Budget Responsibility and National Audit Bill [HL]

My Lords, I beg to move Amendment 8 in my name, with which it will be convenient to discuss Amendment 9, in the name of the Minister, and Amendment 10, which is my amendment to the Minister’s amendment. In some ways, this grouping is rather too extensive, but several important points are enshrined in the amendments. I will start with the Minister's amendment, which states: "““Any Report which the Office makes in pursuance of its duty under this section must include … the main assumptions made by the Office, and … the main risks which the Office considered to be relevant””." We debated both those points at considerable length in Grand Committee, so I certainly welcome the fact that the Minister has tabled the amendment. If we are to be able to appraise the forecasts made by the OBR, it is crucial that we should know on which assumptions they have been made, so I am glad that we shall now be able to do that. Secondly, we should also know the OBR’s assessment of what risks it considered to be relevant—with some indication, I hope, of the probability of this or that risk being realised—so I am strongly in favour of Amendment 9. I believe that the House as a whole will share that view. I turn to my Amendment 8, which suggests that the OBR should not only assess the accuracy of its reports in a post-mortem assessment, as is already required in the Bill, but make, "““a comparison of the fiscal and economic forecasts previously prepared by it with the corresponding forecast prepared by the Bank of England together with an analysis of the difference between the two””." I am concerned that there is an increasing schizophrenia—almost—between, on the one hand, the monetary policy side of things that is managed by the Bank of England’s Monetary Policy Committee and, on the other, the fiscal side. It seems that the Bank of England will operate on one set of forecasts, while the Treasury will operate on the basis of the OBR’s forecasts, supplemented by the forecasts to which the noble Lord, Lord Burns, has referred. It is not helpful to have two separate forecasts being made when we are concerned with the overall position of the management of the economy. Therefore, I hope that my noble friend is able to accept my amendment. In passing, I will express some concern about the Bank of England’s forecasts. If I may divert for a moment, I noticed in the Economist magazine a couple of weeks ago the rather strange statement that the increase in VAT to 20 per cent would, because it will be permanent, be almost entirely passed on. That was a strange thing to say, because the extent to which the increase is passed on should of course depend on the elasticity of demand for the various products that are being taxed. I received a courteous reply from the individual in the Economist who had been responsible for the report. He pointed out that he had relied on a statement made by the Bank of England, which also apparently suggests that the 20 per cent VAT increase will be almost entirely passed on. If that is so, we have an extraordinary number of irrational people selling products in this country. Therefore, I really wonder whether we should rely on the Bank of England’s forecasts as much as we do. We also had some discussion earlier at Question Time on the position of the Bank of England. That is another matter, although I again express some concern because we always understood from Mr Gordon Brown that the Bank’s sole consideration was to be the rate of inflation, which it was to tackle by use of the interest rate. However, we find that interest rates are not going up at the present time for understandable reasons, which imply that the Bank of England, in making its forecasts and everything else, takes into account a number of factors other than inflation, as Mr Brown said it ought to do. Perhaps my noble friend might indicate in passing whether he thinks that the remit of the Bank of England has changed. Finally, my amendment to my noble friend’s amendment suggests that there should be "““an assessment of the current output gap and when the Office expects the current economic cycle to end””." My noble friend previously answered a Written Question from me on what assessment had been made of the movement of the economic cycle, which was an extremely important issue under the previous Government. Mr Brown constantly put great stress on the importance of the economic cycle, but time after time he then changed the date when he thought that the cycle had started and finished. There is a case for having this issue clarified by the Office for Budget Responsibility. Indeed, the Written Answer from my noble friend referred the matter to the Office for Budget Responsibility, which kindly replied by saying that the OBR had not made any assessment of when the economic cycle had actually begun, although it might do so in future, but it was rather clearer on when the current cycle was likely to finish. The OBR went on to say that it believes that the output gap will steadily decline, as "““we judged that there was an output gap of around 3.25 per cent in the second quarter of 2010. Our forecast assumes that the output gap will narrow by approximately 0.7 percentage points a year from 2013-14””.—[Official Report, 16/12/2010, col. WA 222]" The Office for Budget Responsibility should surely follow this matter very carefully indeed, as that is the whole essence of economic management. Given that we are starting off with excess capacity, it is important in making its forecasts that the OBR assesses to what extent the gap is likely to be closed and, in particular, how quickly it is likely to be closed because of the overall economic situation. I very much welcome my noble friend’s Amendment 9, but I hope that he may be prepared to accept that, if we do not have a single forecast, there is a case for making a comparison between the forecasts of the Bank of England and those of the OBR and that we should include in the OBR’s appraisal a clear estimate of the position on the economic cycle.