Memorandum submitted by Professor David
Heald, Sheffield University Management School
BUDGET REPORT 2005: THE NEED TO REFORM FISCAL
INSTITUTIONS
INTRODUCTION
1. The public expenditure changes in Budget
2005 are minimal, as is clearly demonstrated by Tables C11 and
C12 (Treasury, 2005, pp 257-58). A Budget delivered under the
shadow of an imminent General Election can be expected to be even
more political than usual, a feature accentuated on this occasion
by the narrow margin by which the golden rule is now forecast
to be met. Moreover, this is an odd-numbered year, so there is
not the substantive content of, for example, Budget 2004 that
set the spending envelope for Spending Review 2004. Accordingly,
this memorandum reflects upon certain institutional issues that
the Committee may wish to address, briefly now, but more substantively
in the next Parliament. Therefore it considers:
— the general tone of the Budget
process
— the independent audit of macroeconomic
assumptions and
— the status of the Office for
National Statistics
THE GENERAL
TONE OF
THE BUDGET
PROCESS
2. I regard myself as a sympathetic critic
of the public expenditure policy of the Brown Chancellorship,
but I have repeatedly criticised the pretentious titles and pre-written
verbiage that have come to characterise the Budget Report. Sometimes
it seems that the sheer volume is intended to obfuscate rather
than render transparent the Government's fiscal position and plans.
Moreover, the run-up to the Budget is characterised by plants
in particular newspapers, some accurate and others not, in order
to control the agenda. Except in the manipulative sense, Budget
secrecy has become an insider joke. Although I understand the
underlying partisan politics, and the implications of enormous
Parliamentary majorities, these developments undermine the fiscal
scrutiny functions of Parliament. This is undoubtedly part of
a wider problem in which the Executive has little respect for
Parliament, and thus not one for which there are institutional
redesign remedies.
INDEPENDENT AUDIT
OF MACROECONOMIC
ASSUMPTIONS
3. The Treasury always makes extensive reference
to the fact that certain Budget assumptions are audited by the
National Audit Office under the provisions of the Finance Act
1998. An external observer unfamiliar with the UK situation would
be wholly deceived by the Budget Report (Treasury, 2005) as to
the degree of assurance that can be derived from this arrangement.
Unlike in its financial audit and VFM work, the National Audit
Office cannot choose which assumptions to audit. It can only audit
(a) those assumptions that are specifically referred to it by
the Treasury, and (b) previously audited assumptions that come
up for review on a three-year cycle. I have explained my objections
to this arrangement in an academic publication:
The Treasury relied quite heavily on the assumptions
having been independently audited by the National Audit Office
(NAO), following the practice first established in 1997. The NAO
does not audit the forecasts, its role being to ensure that these
forecasts of the public finances are based on assumptions that
are transparent and widely regarded as reasonable. However, the
NAO can only audit the assumptions that the Treasury puts to it,
though since the March 2000 Budget there has been a rolling review
of previously audited assumptions. Thus far, the assumptions embodied
in earlier macro forecasts have not been seriously tested by events.
In such an eventuality, the NAO could be seen to be implicated
in forecasts that later came under challenge, thus deflecting
some blame from the Treasury and potentially creating difficulties
in its relationship to Parliament and its committees. Although
the NAO only audits certain forecasting assumptions, and not forecasting
systems or methodology, this distinction might be lost in practice
(Heald and McLeod, 2002, para 505).
4. There are two further points to add to
the above exposition. First, the arrangement clearly breaches
one of the fundamental postulates of auditing, namely that independence
implies investigatory as well as reporting freedom (Porter, Simon
and Hatherly, 2003, Figure 3.1). The auditor must be clearly independent
in terms of both specifying the work programme and in reporting
findings. The former is breached. Although it might be objected
that this postulate was developed with reference to audits that
certify financial statements, the counter is that the use of the
language of audit and the choice of the National Audit Office
as auditor are clearly intended to confer legitimacy upon the
exercise. [2]Second,
the external observer might expect that the body responsible for
auditing the Treasury's macroeconomic assumptions would devote
substantial resources to this task, given its technical complexity
and political salience. Instead, the National Audit Office has
advised that the cost in 2002-03 was £65,000 (Tyrie, 2005,
p 123). In part, this is due to the very short notice that the
National Audit Office is given by the Treasury of new references
of assumptions, though clearly those assumptions coming up for
review on the three-year cycle are predictable. For Budget 2005,
clearly a sensitive time in connection with both the electoral
cycle and performance against the golden rule, there were no new
references. The only assumption reviewed on the three-year cycle
was the unemployment assumption, which does not seem likely to
have been the first choice of an auditor with unrestricted rights
of access and questioning. In my view, the Committee and other
relevant Parliamentary bodies should urgently review the requirements
of the Finance Act 1998. The National Audit Office needs to be
dug out of the trap into which it has walked, in part out of a
desire to be helpful.
THE STATUS
OF THE
OFFICE FOR
NATIONAL STATISTICS
5. Shortly before the Budget, there was
controversy in the media following the announcement that the Office
for National Statistics would revise its public expenditure figures
in a way that would make it easier for the Treasury to meet the
golden rule in this economic cycle. The way in which this was
originally reported, namely as a discretionary classification
change regarding road maintenance, prompted cynicism that there
had been political interference by the Treasury. Subsequent clarification
(Office for National Statistics, 2005) indicates that the issue
related instead to the correction of double counting rather than
reclassification. This episode illustrates two important points.
First, the position of the Office for National Statistics as an
Executive Agency of the Treasury is perceived to undermine operational
independence, even if that perception is unjustified. If the Treasury
is going to place such reliance on compliance against fiscal rules,
the scorekeeper of those rules must be seen to be independent.
Accordingly, the Office for National Statistics should become
an Executive Agency of Parliament, with suitable protective buffers
established. Second, compliance with the golden rule, either way,
should not be dependent upon chance reclassifications. When private
sector firms take on debt covenants, these are often formulated
in terms of constant (ie unchanged) Generally Accepted Accounting
Practice, in order to protect both parties to the transaction
from unexpected changes in accounting standards. Exactly the same
point should apply here, so that classification changes are adjusted
for.[3]
As with cricket batsmen, it is better to have a lucky Chancellor
of the Exchequer than an unlucky one, though it is unwise to let
too much rest upon this. Although most expert observers do not
believe that a minor infringement of the golden rule in this or
another cycle is particularly important economically, the political
stakes in terms of ministerial credibility have been made high
by the amount of credit that has been claimed for past compliance.
Similarly, the definition of the economic cycle should not be
under the sole control of the Treasury.
CONCLUSION
6. A confident and competent Treasury is
essential for effective economic performance, as those who remember
when it was otherwise would certainly testify. However, these
positive qualities, unless counter-balanced, can destabilise the
relationships both between the Treasury and functional government
departments and between the Government and Parliament. Therefore
resistance to the proposals contained in this memorandum, on the
grounds that the system has recently worked well, should be surmounted.
Such an attitude is both complacent and under-estimates the institutional
design problems that require urgent remedy.
18 March 2005
References
Heald, DA and A McLeod (2002) "Public Expenditure",
in The Laws of Scotland: Stair Memorial Encyclopaedia—Constitutional
Law Volume, Edinburgh, LexisNexis Butterworths, paras 480-551.
National Audit Office (2005) Audit of Assumptions
for Budget 2005, HC 452 of Session 2004-05, London, Stationery
Office.
Office for National Statistics (2005) Revisions
to Public Sector Finances—road maintenance and repair, News
Release, 28 February, London, Office for National Statistics.
Porter, B, J Simon and D Hatherly (2003) Principles
of External Auditing, second edition, Chichester, Wiley, 2003.
Power, M (1997) The Audit Society: Rituals of
Verification, Oxford, Oxford University Press.
Treasury (2005) Budget 2005—Investing
for Our Future: Fairness and Opportunity for Britain's Hard-Working
Families—Economic and Fiscal Strategy Report and Financial
Statement and Budget Report, March 2005, HC 372 of Session 2004-05,
London, Stationery Office.
Tyrie, A (2005) "Q. 29", in Public
Accounts Commission, Twelfth Report, HC 216 of Session 2004-05,
London, Stationery Office.
2 See Power (1997) on the expansion of audit into non-traditional
areas. Back
3
In this specific case of the correction of data error, a case
could be made either way, for adjustment or for non-adjustment. Back
|
