Examination of Witnesses (Questions 79-146)|
22 JULY 2010
Q79 Chair: Welcome to this, our third
evidence session on the OBR. Thank you very much for coming along,
and it is much appreciated. I think we have an opportunity, all
of us, to influence the structure and statutory basis of this
body by making timely remarks now. We have a troika here in front
of us of people who have thought very deeply about these issues
over many years. I wondered if I could begin by asking each of
you to comment in turn on what you see as the principal challenges
there are to creating an independent OBR and in particular perhaps
to orientate comments on two types of point: firstly, how to reconcile
the appearance of independence with the fact that a large number
of the forecasters, unless we have huge duplication, will have
to remain in the Treasury when they are doing this work at forecasting
time, a point which we explored with Alan, and secondly, how far,
if at all, beyond the forecast we would expect the Chairman or
the three people running the OBR to go in commenting on the overall
fiscal stance and whether that will help or hinder the good conduct
of fiscal policy and overall financial policy in Britain. Who
would like to begin?
Mr Chote: You have
clearly answered the question as to what the biggest challenges
are by identifying in particular the first one, which is the question
of how you first have the reality and the appearance of independence,
and yet you do not weaken the analytical capacity of the system
as a whole, comprising officials and the independent body too.
I think it certainly is possible to combine those two things.
In some of the debate we have had so far there is a tendency to
see officials as part of the problem rather than as part of the
solution. In fact, one of the attractions of this reform is that
it potentially offers greater encouragement, greaternot
quite endorsement but it will help officials speak truth to power,
as we would wish them to be doing anyway, with the knowledge that
the OBR is an equally important customer for their analysis as
the Chancellor is. So I actually see this as being quite positive
in terms of independence, not just for this body itself but also
about providing a reinforcement to what we would hope would be
the role of Treasury officials anyway. I certainly do not think
that the options of either taking everybody who has any involvement
with the forecast out of the Treasury and putting it into the
OBR is a practical one, for all the reasons you have talked aboutthe
number of people who spend a relatively small amount of their
time on the harvestand completely duplicating would both
be a waste of taxpayers' money and you would have people duplicating
the policy expertise as well. In a way, it is a slightly stepped
up version of the New Zealand model, where you have the officials
taking responsibility. In that system it is the Permanent Secretary
who signs off the forecast and sometimes the Finance Minister
publicly disagrees with it after the event. I do not think in
the country that invented "Yes, Minister" we could ever
get away with having Sir Nicholas signing off a forecast and that
being deemed independent, but having this combination, although
it is clearly a difficulty, does present possible benefits for
both sides of the relationship, for the OBR having access to good
analysis and for officials feeling more empowered to speak truth
to power, to Ministers.
Q80 Chair: Before we leave that subject,
it is very interesting: are you leaning therefore strongly towards
what is known in the trade as the validation model?
Mr Chote: The model as I understand
at the moment is the idea that you take those officials who are
spending the majority of their time on the forecast out and put
them into the OBR. That seems to me to be a reasonable one. I
was slightly surprised when Alan said he thought that would only
be three people; I would have thought there would be rather more
people than that who would come under the category of owing their
primary loyalty to that sort of area but, essentially speaking,
you are having something where you want to make the most of the
knowledge that is within the system to obviously demonstrate independence.
At the core, you demonstrate independence through the quality,
the explanation and the presentation of the analysis you do. You
could locate this institution in the Isle of Skye and staff it
with Benedictine monks and people would still be concerned about
its independence if they look at its outputs and say, "Why
did they say that?" Explain your working, be transparent
about it and that at the end of the day is the greatest source
of credibility for a body such as this.
Q81 Chair: Can I take up your suggestion
and move along the line on the first of the two points I raised
and then we will come back to the second.
Professor Besley: I can probably
agree with what Robert has said. The only thing I would really
add is I think the independence of this organisation really resides
at the top of the organisation. I am perfectly relaxed about the
idea of having analysts and others interacting with people from
the Bank, from the Treasury, from wherever, to try and come up
with the best technocratic solution to the forecasting problem
without thinking that that is going to compromise in any deep
sense the independence of this organisation. It is really a co-operative
relationship to make sure that we make best use of expertise wherever
it resides and to make sure that is brought into the process.
What really counts is that the individuals at the top are able
to have a staff of critical mass who they can use as a task force
to interrogate, to provide that really independent perspective
on what is happening in Treasury or wherever else is relevant,
and that that body ultimately signs off on the reports of the
organisation and signs off on the forecasts and is the core at
the level of which independence really resides. I think we need
to separate independence at that point from the way the staff
operate on a daily basis, which I could imagine really is not
compromising independence that much. I have seen the way it operates,
for example, at the Bank of England, where the staff will spend
quite a bit of time talking to wherever the expertise resides
without in any sense compromising the independence of the Bank.
Professor Wren-Lewis: Yes, I would
probably agree with what has been said. I think the model that
we seem to be moving to, where there is a core staff from the
OBRand I think it certainly has to be more than threewhich
is responsible for the forecasting, which taps into the resources
of the Treasury in terms of detailed information, is tenable,
and I think that model can work, but it does raise a public perception
of independence problem which I think one needs to address and
think about whether there are things one can do as well to, in
a sense, counteract that impression that maybe the OBR is too
close to government. Certainly, if you look around similar bodies
around the world, fiscal councils in other countries do not have
a major problem of independence but they are also perhaps a little
less involved in government than the OBR is planned to be. They
tend to be watchdogs which comment on what government does rather
than replace an existing activity of government. What the OBR
has done is replace an existing activity of government and that
makes it more vulnerable to the accusation of lack of independence.
In a sense, we need to think about active ways in which we can
promote the independence of the OBR, given that there is this
Q82 Chair: And on the wide remit
versus the narrow remit point?
Mr Chote: The focus as it has
been set out so far is really in terms of the mandate that the
Chancellor has currently set, which is really looking over a five-year
view, and sustainability, which is clearly looking over a much
longer time horizon, so you are looking at the prospective paths
over 50 years or beyond, which essentially are the sort of issues
you are looking at. For example, on the issue about whether the
OBR should comment on the merits of the mandate per se in the
short term, I think the way it should do that is by looking at
its consistency with sustainability in the longer term. So it
has responsibilities to judge on and it would certainly be reasonable
to say if you just achieve the mandate that you have set out,
that does not deliver you sustainability on whatever analytical
approach you want to go at that with. That would seem to me to
be a perfectly reasonable thing. You have then the issue of, for
example, pace of consolidation: should the OBR comment on the
merits of achieving the fiscal consolidation that is aimed for
over five years or over eight or whatever that may be? That I
do not think should necessarily be recommended on but, clearly,
the fact that it is now responsible for both macro-economic forecasting
and fiscal forecasting means that you are, by producing forecasts
of both, implicitly reaching a judgment on whether you think that
action to achieve the mandate with the degree of caution that
the Government is aiming for is consistent with sustaining a reasonable
path for the economy or not. In doing that, it would certainly
be sensible to look at the enormous uncertainties that lie both
around the path of the economy and around the public finances
in commenting on that. I think by doing that, you are getting
quite a lot of information and analysis which others would easily
use in reaching those sorts of judgments. I think the body should
be wary about saying, "Well, actually, we think five years
is crackers to try to achieve this. You ought to do it over eight"
or "you ought to do it over two." The fact that it has
this twin responsibility on forecasting means that it is inevitably
going to be commenting on that mix.
Professor Besley: I am strongly
of the view that if the broad object of the organisation is to
safeguard fiscal sustainability in the UK, it has to have a remit
that allows it to range over the entire set of issues that are
germane to that. Taking an example from the past, had the OBR
existed since, say, 2000, I would hope it would have produced
commentary on some of the risks around fiscal policy with respect
to the taxation that was being raised from the financial sector
and that it would have felt perfectly justified to raise such
an issue independently because it felt it was an important part
of the outlook. To constrain artificially in any way the ability
of this body to comment on what is germane to that broad objective
I think would compromise its independence and compromise its institutional
integrity. I feel pretty strongly that some aspect of a commentary
function has to be accepted within its remit under the broad heading
of achieving fiscal sustainability. In terms of its other two
functionsI always always thought of it having three functions:
a commentary function on issues germane to the outlook, the short-term
to medium-term forecasting function and then the long-term forecasting
function, and I would have thought functionally the organisation
would have groups more or less devoted to each of those things.
The problem with putting too much weight on the short- and medium-term
forecasting is that this organisation is bound to fail if that
is the way in which we judge it, because we know that the success
of short-term economic forecasting is extremely limited, and for
good reasons; it is just not a science, if you want to call it
a science, or an art, that is fully developed to a point where
we can rely wholly ... It does not mean forecasts are unintelligent
or based on deliberately misleading data. It is just the nature
of the exercise, and so if this organisation is judged on the
basis of whether it happens to forecast well over a two-year horizon
and we come back in two years and say, "Oh, you got it wrong
and therefore this organisation is not serving an important social
purpose," I think that would be the wrong way to look at
it. What matters is the quality of the commentary around fiscal
risks and fiscal sustainability that will make this organisation
useful in the public debate, and we have to firmly put that at
the centre of what we are trying to achieve with OBR, in my view.
Professor Wren-Lewis: I could
not agree with that more. I think the dangers to the credibility
of the organisation of focusing on the short-term forecasting
role are very large because forecasts are always wrong. Also,
I think it would be unfortunate because it puts the focus on the
short term, whereas issues to do with fiscal policy much more
medium- and long-run in nature. So I think it is essential for
the OBR to not just provide that role but also to look at issues
of long-run sustainability, doing medium- to long-run forecasts
as well, in a sense possibly putting that at least on an equal
footing with its role in producing the pre- and post-budget forecast.
The website of the Central Planning Bureau in the Netherlands
is indicative here because the Central Planning Bureau in the
Netherlands is probably closest to the OBR-type role in that it
produces the Government's forecast but on their website they say
that the surest way of demonstrating independence is in the quality
of your analysis. The OBR needs to have the resources to produce
good-quality analysis as well as producing forecasts.
Q83 Mr Garnier: You have half-answered
my first question, which is really: what do you think the primary
purpose is of the OBR? Within that question there are a range
of arguments that have been advanced for an independent fiscal
body, and one of the things I find myself questioning over and
over again is that we have here three representatives of genuinely
independent bodies who analyse the economy and fiscal practice;
what is the OBR going to add to what you are already doing?
Mr Chote: I would make some distinction
there between macro-economic forecasting and fiscal forecasting,
where in a sense the OBR, as a newly created body, does not have
an informational advantage in doing macro-economic forecasting
over anybody else. The information that you use to do that is
pretty much in the public domain. You have a resource advantage
in terms of most people the equivalent of ourselves who do do
macro forecastingwe do nothave less resources to
do it, so there is clearly a value there. The difference is with
fiscal forecasting, where any external person is at an informational
disadvantage. For example, we do not have access to an awful lot
of the information on tax receipts and spending patterns that
the Treasury does, and therefore there is always a suspicion when
we say, as for example we did during the second term of the last
Government, that we think that the Treasury is being over-optimistic
in its forecasts over a five-year time horizon because we are
not as confident as they are that revenues will come in quickly.
There is always the suspicion in people's minds that the Treasury
must know something that you do not, and that is why you have
this credibility issue of the fact that Ministers can get away
with politically inspired wishful thinking from time to time because
they know that from outside people might well assume that they
know something that everybody else does not know. Over time, if
the forecasts are repeatedly wrong, obviously that is eroded,
and that happened over that period. I think the value there is
partly this informational asymmetry and it is more pronounced
on the fiscal side than it is on the macro-economic side.
Professor Besley: I agree with
that and, just building on that comment, I think one key role
of OBR will be to decide how to present and disseminate data,
obviously subject to suitable confidentiality wherever that applies,
in order to increase transparency in debates about fiscal policy
and it can only do that if it has access to the full array of
potential statistics and data that are available to government
and it can make a judgment about the best way to present that
so that it is useful to you, to whoever is reading that. Equally,
I would hope over timeit is a small point but I will make
itthat OBR would be given a role in assessing how well
fiscal data is being generated in the UK, much as, as I say, the
Bank of England plays a role in assessing whether ONS is producing
data appropriate to the conduct of monetary policy. I think there
is a similar role for OBR to comment annually or some period on
the quality of the fiscal statistics that we have and potential
improvements in that. It can only do that from an official standpoint.
So while it is true that there are independent bodies that perhaps
have the analytical capacity, and I would hope the OBR would draw
on that freely because there is much expertise out there that
can be drawn on, it is only by having it as an official body that
it can perform the role Robert that was describing.
Professor Wren-Lewis: I would
like to add two points. First of all, I do not think we should
over-emphasize how much analytical capacity is already there.
There is some. What Robert does is extremely useful and well informed
but the IFS looks across a range of issues to do with taxation.
It is not focused on the issue of the medium- to long-run budgetary
position. The National Institute does many other things as well.
So I do not think it is as if there is an over-crowded field already
there. I think there is plenty of space for additional expertise.
That is the first point I would make. The second point I think
is that inevitably a fiscal council that is set up by the Government,
an OBR, does have additional authority and additional political
clout so that if the OBR says you are doing something wrong, it
is much more difficult for the Government to shrug it off and
say, "Oh, that is just one view and there is another view
over there" because it is a body that it itself has set up.
It is interesting to look at this historically. Both the IFS and
the National Institute did quite clearly say that the previous
Government were making over-optimistic assumptions on the Budget
and what you have to ask yourself as a thought experiment is "Well,
OK, that didn't seem to have that much effect but if an OBR had
been in existence, maybe that might have had a little bit more
Q84 Mr Garnier: Professor Wren-Lewis,
I gather you proposed an institution similar to the OBR in 2006
in order to help stabilise national debt. How do you think the
OBR matches up to your original plan and your expectation?
Professor Wren-Lewis: Actually,
I think I wrote my first article proposing something like the
OBR 14 years ago, so it is something I have been banging on about
for some time. No, you are right; in 2007 I did put forward a
fairly detailed proposal and there are a lot of similarities between
the OBR and that. The major difference is I did not see the OBR
as actually replacing what the Treasury does in terms of producing
the post-Budget forecast; I saw it as producing an alternative
or commenting on that forecast but not replacing it. So the OBR
has almost gone a little bit further than my proposal.
Q85 Mr Garnier: A much wider point,
as we are going back, if you like, to the General Election when
everybody was rushing around making promises, George Osborne,
when we announced our Manifesto, and I quote, "promised today
that by the time of our first Budget we would have set up and
be running an Office for Budget Responsibility", which we
have done, "that will hold a Conservative Government to account
for the promises it makes to the British people." Do you
think that the OBR is doing that already and will it be able to
do that in the future?
Mr Chote: In terms of some of
the promises, in terms of the fiscal mandate that was set out.
What was slightly odd at the election was that you did not actually
have the mandate formalised until the time of the Budget, so you
had this slightly odd arrangement where you had the initial pre-Budget
forecast and then mandate and the policy measures together there,
and crucially, at that stage, the Government decides in seeking
to achieve the mandate with what caution it wishes to do so, i.e.
it has not set policy so as to achieve the 50-50 probability of
achieving the mandate that the OBR is tasked with saying what
it is necessary to do, but has said more than that. One difficulty
in terms of holding to account, not an insuperable one, is that
we have now moved to a forward-looking target. The idea, I think,
is that this mandate rolls forward, although the Chancellor has
also mentioned the possibility that the time horizon could be
shortened, so quite where we end up with that I do not know. The
previous Conservative Government had a series of policies aimed
at achieving balance in the medium term, or words to that effect,
and when Labour came in they made for a fiscal rule that was defined
in a way that you could judge it as pass or fail by actually saying
it has to be achieved between two points, points which elasticated
entertainingly over that period, but, nonetheless, you could after
the event say whether this had been met or not. In assessing and
describing the success of the Government in achieving what it
is seeking to do will depend on how the mandate is, as it were,
redefined as we move forward and to what extent you say, "This
is what they set out to do in five years' time. Five years on,
obviously, a lot has changed and that is no longer the target
that you are aiming for." If you have, for example, fiscal
drag in the system, there is always a built-in fiscal tightening
over five years on unchanged policy because the average tax rate
rises, so you can always be running a roughly 1% of GDP deficit
and say with hand on heart that on unchanged policy in five years'
time you will be in balance, and you can keep doing that every
year and you just put off the year and you just never actually
get there. So it is quite complicated given this rule to actually
have a pass/fail test but that in no way would prevent the institution
saying whether policy has been set consistently with the objectives
the Government has set out for itself.
Professor Besley: That discussion
just illustrates, I think, why it is important that the OBR have
a wide enough mandate to comment on exactly that set of issues,
because if they feel that the way in which the mandate is proposed
is not actually suitable to the task, they really ought to be
saying that, and I would hope the Director of OBR would say that.
Chair: We have quite a bit of business
to get through this morning, so if witnesses feel they have not
been given a fair crack of the whip on a particular question,
please do write in. Written responses will be treated as of equal
value. I know there are a lot of colleagues who want to come in.
Q86 David Rutley: There seems to
me some consensus amongst you that there needs to be a wider commentary
function for the OBR going forward. Just to test the outer limits
though, you have mentioned the fiscal council in the Netherlands,
which has gained a reputation for costing government policies
and also opposition policies. Would the OBR or should the OBR
go that far, just, again, trying to test what the outer limit
should be, in the commentary function?
Professor Wren-Lewis: Can I start
by a simple answer, and that is "yes". I think that
is a good thing to do anyway because I think it will raise the
level of public debate around elections, it would stop opposition
parties promising to do everything without costing it properly.
I also think it would foster independence, the notion of independence,
because you would start a dialogue not just between the OBR and
the Government, which is a necessary dialogue and is always going
to be there, but you also start a dialogue with the Opposition.
I think that would be useful for independence as well. So my answer
to that is a definite "yes". I mentioned the parallel
between the OBR and the Central Planning Bureau before and I think
it is no accident that it also does this role of costing Opposition
policies. I think that is a very good idea.
Professor Besley: I would sound
one note of caution on that general idea though: if the OBRperhaps
this would be relevant only around election timewas constantly
having to respond to requests to do analysis of different programmes
from all comers, the level of resource it would need would be
enormous to be able to service such requests. Provided there is
a resource that is consistent with being able to do this, it is
a fine idea but my worry is it would really stretch an organisation
to suddenly find every new policy from any place in the political
spectrum was being put to OBR for a proper analysis and costing
at any point in the political cycle.
Mr Chote: There is clearly a problem
here that the costings are going to have to be done in most cases,
for example, a welfare package or a corporate tax package, by
exactly the people that we have described in the Treasury, who
are only spending a relatively small amount of their time on the
forecasting, so it really is as much a question about whether
Treasury resources should be used in that way or not, because
if the OBR was asked to cost a proposal to equalise the CGT rate
with income tax, for example, that is not something that its 10-15
people would have the capacity to do. That is the team with the
expertise in that area within the Treasury. So actually finessing
that would be quite difficult. You can think of this role of the
opposition parties, and there are a number of elements to this.
Simon has mentioned the Dutch model, the Central Planning Bureau.
There basically the parties submit their plans prior to the election
and, God help them, there are nine parties that the CPB has to
actually run the slide rule over, and that is clearly a very resource-intensive
piece of work.
Q87 Mr Mudie: It will be easier:
we are now down to two!
Mr Chote: We cannot guarantee
that that will always be the case. There is a sustainability issue
perhaps there. The other issue which we have at the moment with
the costing of Opposition policiesand I do not know whether
this has happened under this Government, as it did under the last
oneis that you have this odd model whereby Ministers would
ask Treasury officials to cost Opposition policies privately and
from outside there occasionally seemed to be a suggestion that
if the answer was disobliging, a conveniently timed Freedom of
Information request would ask for that information and then that
came into the public domain. If that sort of process continues,
there is an interesting question there as to whether that should
be done, because if that policy was actually enacted, the OBR,
as it did in the Budget, would have to sign off the costing as
reasonable. If the Government is going to release its costing
of somebody else's policy, should the OBR be signing that off?
I think there are several dimensions to this area but it is certainly
worth considering. There may be an issue in terms of going to
the full Dutch model of the body needing to establish its credibility
before going all that distance.
David Rutley: Just coming on to structures,
obviously, it is key to establish independence. I just wondered
what your thoughts were about the optimal organisational or institutional
structure that should be developed for the OBR. Sir Alan pointed
to a category from the Institute of Governance view on this that
there should be an independent public interest body or such body.
Do we need to look at something like the National Audit Office
as a model? Where would you see this body being created? The other
question which perhaps in the interests of time you could answer
is, should there be three members of the Budget Responsibility
Committee or should it be five? Should that be a review body or
should it be, as it is at the moment, a roll-your-sleeves-up,
Q88 Chair: Can I ask the witnesses
to keep their answers brief and if they want to amplify what they
say in writing, please do.
Professor Wren-Lewis: I do not
really have that much expertise on the general issue of different
quangos and how they are structured but on the point about the
Budgetary Responsibility Committee I do have a clear view, and
that is that I think it would be a very good idea if that body
had what I think Sir Alan has called non-executive members, such
that it became a much wider board where you had the three members
as at present but you also had people who were not on the staff,
who were not drawing a salary, but had expertise in the area of
fiscal policy and macro-economic forecasting, who could play a
supervisory role at a professional level. I think that would be
very good both for the quality of the work that the OBR did, for
the internal governance, and also for the protection of independence
as well; I think it would help there.
Q89 Jesse Norman: I would like to
pick up on some of the questions raised earlier and just take
the situation, for example, after the year 2000 and look at where
the scope of the OBR might have fallen. Presumably, your view
is that it should have been able, given your commentary function,
to comment on the rise in public spending and public indebtedness.
Should it have been able to comment on the fiscal implications
of, for example, the housing bubble or personal indebtedness,
or is that the other side of a line? How do you draw the line
as to commentary on the current economic situation?
Mr Chote: I think those sorts
of issues about what is going on in asset markets are more to
bring together the long-term sustainability, the fiscal analysis
and the macro-economic forecasting elements. If you believed that
the future expected income from the financial sector, for example,
looked implausible on the basis of the analysis you did of the
likely or possible paths of that, that would certainly be something
that is reasonable to talk about. You described a spending problem,
that that was a spending problem, there was too much spending;
you could equally of course describe it as a not-enough-taxing
problem, that actually, the errors showed up not because the Government
was spending more than it had expected to, except when it did
so deliberately, but that it did not raise as much revenue as
it had hoped to do. So arguably it is two blades to the scissors
and you could say it is an under-taxing policy as well as an over-spending
one. I would be warywe have certainly taken this approach
at the IFSthat it is not for us to comment on whether we
should be a high-taxing, high-spending or a low-taxing, low-spending
economy. You can say that but, of course, at the same time, if
you take a very broad view of the sustainability issues, you may
say that the individual details of particular policy measures,
those sorts of judgments, will affect the long-term productive
potential of the economy and, arguably, anything which affects
that in some senses impinges on sustainability and you can draw
your remit as widely as possible. The line is clearly blurred
here and you have to take a sensible approach as to how far you
push it but I would certainly be happier with looking at the implications
of what is going on in asset markets for the macro-economic and
fiscal outlook than I would be on reaching a judgment about whether
we are together spending and taxing too much or spending and taxing
too little. The focus is on the gap between the two: famously,
if you go for Swedish levels of public service and American tax
rates, that is not sustainable.
Professor Besley: Your question
really underlines why it is important to have somebody as a Chair
of OBR who has good judgment about how to interpret the mandate.
I would have been very disappointed if the Head of OBR had not
been proactive in debating the issues that you raise. For this
to be an independent body, it has to be something that the body
itself makes a judgment on where the line lies, because I do not
think it would be possible to legislate or to write down a domain
in which this is on limits and this is off limits. If the broad
goal of the body is to maintain fiscal sustainability, then the
judgment of the Chair of OBR, I assume in consultation with other
members, has to be the arbiter of where that domain is and hopefully
it will exercise it judiciously.
Q90 Jesse Norman: Can I just ask
a supplementary on that question? Obviously, many economists believe
that having a lot of debt is itself an impediment to long-term
growth, so the line that you are talking about threatens to pull
someone who is running the OBR into a political judgment on those
kinds of grounds in that situation: it seems to me inevitably,
because they will have to either accept or reject a body of academic
work which bears on that question, which has in itself political
Professor Besley: Yes, these issues
arise, for example, with governors of central banks as to at what
point they are drawn into discussions or what is the domain in
which they are able to comment. This is an issue we are used to
dealing with. We hope to deal with it by having people in those
positions who have good judgment and show it in relation to these
tricky grey areas, but I cannot see that we can deal with it any
other way than to hope we have somebody sitting in the Chair who
has good judgment over those particular issues.
Professor Wren-Lewis: Just very
quickly, it seems to me that the question of the general size
of the state is not one that you would want OBR to discuss. The
question of whether it is detrimental to run a very high but sustainable
debt level is, I think, one that you would want the OBR to certainly
look at the evidence on.
Q91 Jesse Norman: Is it therefore
the case that none of you can really see circumstances under which
there would be criticism by the OBR of government policy? Just
to draw out some alternatives, you might say there will not be
criticism of policy but there might be a view of the economic
forecast which implies a criticism, or you might say that actually,
a policy which is clearly fiscally unsustainable and detrimental
for growth would be a fit subject for criticism, or you might
say, as it were, there is a separate category, which is that abuse
of statistics, or a misuse of the Treasury function for political
purposes, was in and of itself a subject for criticism. Could
you just touch on those different categories.
Professor Besley: Since, using
the phrase of Alan Budd, bringing the economics back into fiscal
policy is the key role of this organisation, I think provided
that the Head of OBR believes that there is sound economic reasoning
behind a particular position that is germane to its mandate, fiscal
sustainability, they would speak out but with respect for the
fact that there is a political process, and one does not want
to speak out of turn, influencing a political process at certain
crucial moments. We know that these are very difficult things
when they happen. I would have thought that, were there a serious
difference of judgment over the economy between, say, the Chancellor
and the Head of OBR, that could be under certain conditions put
into the public domain and debated, and that is the role of transparency
in the process, to have all views aired, aired intelligently,
and hopefully we can be grown up enough to have a proper debate,
not a debate that is too much inflamed over that and pointing
at different people in different seats having different views.
We know that is how the world really looks and hopefully they
can conduct themselves appropriately.
Q92 Jesse Norman: So all three categories
would be, as it were, commentable?
Professor Besley: In my view,
yes, but maybe others disagree.
Mr Chote: Certainly, for example,
I do not know whether you mean misusing the OBR's analysis and
interpreting it in a way it should not be interpretedthat
is clearly something that the OBR would want to respond swiftly
to. So if somebody were basically taking some analysis, misinterpreting
it and drawing a conclusion that they should not have drawn from
it, then I think you would respond to that very quickly. Clearly,
there are issues over whether the person doing that knew or understood,
so you have clearly had the debate over recent weeks with the
interim body and what was said at PMQs about the employment numbers,
for example. On the issue of disagreement, I know you had a discussion
with Alan on the issue about what happens if the Chancellor just
disagrees with the fiscal projections and whether you just say,
"Our view is that he is not going to achieve his goal if
he does what he is going to do," I think you inevitably end
up being rather more nuanced in response to that because of the
wide range of uncertainties around any central forecast. The interim
OBR is producing a fan chart of outcomes based on past forecast
errors from the Treasury, which is the same way we present ours,
and so it is not as though the Chancellor is either definitely
going to hit the target if he follows the OBR's advice and definitely
not if he does not. You can look at that in the context of the
uncertainties around it. So at the moment he has set policy in
such a way that if the interim OBR's forecast is as accurate as
previous ones, you think he probably has a roughly 60-and-a-bit
% chance of achieving the mandate in 2015-16 and a very slightly
higher than 50% chance of achieving it in 2014-15 and there are
clearly big uncertainties around there. So you could say, "Look,
on our best judgment, he probably has a 40-50% chance of hitting
it." You are not necessarily going to say, "Well, he
has not taken our views and we wash our hands of the whole process";
you put it into the context of the rhetorical weight that the
analysis will bear.
Q93 Michael Fallon: Professor Wren-Lewis,
the IFS said that the cost of commenting on broader economic policy
could be getting drawn unnecessarily into conflict with other
parts of the policy-making process and therefore reduce the OBR's
credibility. Do you agree with that?
Professor Wren-Lewis: You can
certainly imagine a situation where the new Director of the OBR
got carried away and started commenting on things which it would
be much wiser not to comment on, so it is conceivable it could
happen but I would hope it would not happen, and I think any sensible
Director would make sure it did not. The problem with the fiscal
remit is that a lot of things touch on it, so potentially your
field for commentary is very large but any sensible Director will
realise that you have to be sparing in your commentary and you
have to focus on the things that you have particular expertise
about, that are particularly in your remit, rather than discuss
everything under the sun.
Q94 Michael Fallon: I understand
that but it is clear that your earlier proposals for the OBR as
more of a watchdog role, perhaps even a whistle blowing role,
but supposing the Government started stretching its fiscal rule,
tweaking or bending the rule, and the Director was uncomfortable
with it, should he not say so?
Professor Wren-Lewis: Absolutely
he should say; that is a clear example where he should.
Q95 Michael Fallon: So he should
be able to comment on aspects of fiscal policy that are not directly
related to forecasting or sustainability?
Professor Wren-Lewis: I think
it is related to sustainability. Certainly he should be able to
comment on things beyond the forecast itself and its production,
yes. He should be able to comment on issues that impinge on fiscal
sustainability. An absolutely clear-cut example is, supposing
that because of some new event, the Government proposes redefining
or defining in a particular way particular bits of public expenditure
so they do not appear in the accounts, fiddling the figures in
that sense, we would certainly want the Chairman of the OBR to
say technically the mandate has been hit but only because of this
rather underhand fiddling with the figures.
Q96 Michael Fallon: Supposing the
Government proposed to adjust its forward-looking fiscal rule,
for example, would the Director of the OBR be able to say openly
that it was unhappy with the way that was being promulgated?
Professor Wren-Lewis: If he was.
I think it goes both ways. You can imagine situations where, say,
a couple of years before the end of the Parliament the economy
is hit by some shock which means that unless the Government does
something drastic, they will not hit their target. In that position,
there is a judgment to be made: should the Government do something
about it, or is it sensible to take a longer-term view and think
this is just a temporary shock and it does not undermine the overall
sustainability of the public accounts? I would have thought the
Director of the OBR should comment on that.
Q97 Michael Fallon: Finally, how
wide a research function do you think the OBR should have? Should
it have a research analysis department that is separate from the
forecasting division? Should it build up a research expertise?
Professor Wren-Lewis: It certainly
should build up research expertise. Whether you need a separate
department, I think probably not because there is a periodicity
involved in its activities. You would probably want everyone involved
in the forecast while it is going on, because it is a very intensive
activity, and then you have a more fallow time when pretty well
everyone can embark on research. So in a sense, I think having
a separate research department would be unnecessary.
Q98 Michael Fallon: You have looked
at these equivalent fiscal councils around the world. What would
be the size you would envisage of the total establishment here?
Professor Wren-Lewis: Alan has
mentioned 15-20. Looking at what is done around the world, something
more like 20-30 I would have thought was reasonable. You are never
going to match the resources which the Congressional Budget Office
have; I think they have between 200 and 250 personnel, but they
do a lot more than we are thinking the OBR will do. So I would
have thought 20-30 is a reasonable number.
Q99 Mr Mudie: I just want to emphasize
that we have not seen the Bill and all we are talking about is
the Chancellor's agreement with Sir Alan. I want you to put yourselves
in our position, which is that this is a very good move in terms
of setting this up but if you were sitting at this end of the
table, as backbench Members of Parliament, what would you be saying?
Would you be seeing this as a very limited arrangement between
the Treasury and the Office, where the question of freedom in
the range is a matter for how brave the Chairman of the Office
is, rather than a dual mandate where that could be one. Would
you be satisfied with this relationship if you were at this side
of the table? We have a blank piece of paper, the principle of
having this office being set up, it is a very big moment for Parliamentwould
you be happy with it?
Mr Chote: There is what sort of
relationship the body should have with this Committee, with Parliament,
and there are all the issues around appointment
Q100 Mr Mudie: Robert, the agreement
is between the Treasury and the Office for Budget Responsibility.
There it is there. Should we be satisfied that we have no relationship?
In fact, Sir Alan pretty patronisingly said we have a very legitimate
interest in questioning him. Is that the extent, when we set up
this body, that a group of politicians should be satisfied with
questioning? Should that role not be a more active part of this
Mr Chote: I think anybody running
this body would see their primary and ultimate responsibility
being to the general public, to improve the quality and trustworthiness
of the analysis upon which the Chancellor was basing his decisions
and you are basing your analysis and comment, favourable or unfavourable
as it might be. Clearly, the fact that the Chancellor has said
that this body is going to be producing the forecast means that
there is a particular relationship there with the Chancellor and
with officials, in the sense that you have to iterate during the
process of the Chancellor coming up with a Budget, i.e., you will
be talking to them
Q101 Mr Mudie: No, that is forecasting,
but we are commenting on and hoping for a broadening out. That
is a matter between the Chancellor and the courage of the Chairman.
We have no part to play in that. We can only hope that it develops.
Would you be satisfied with that if you were sitting this side
of the table?
Mr Chote: I think you come back
to Tim's point about how much of this you can spell out in advance.
You all find it hard to predict now what questions you think will
be the most important to us in three or four years' time.
Q102 Mr Mudie: But we do not have
an opportunity in four or five years' time to say, "We think
you should look at this, we think you should look at that."
We cannot ask that. Well, we could ask it but we cannot get any
agreement because the agreement on what they do is with the Chancellor.
You seem pretty satisfied with that. What about the other two?
Professor Besley: You are raising
an important and constitutional question about the role of Parliament
in the scrutiny of public finances. You are better placed than
I am to judge whether you think sufficient resources are devoted
to Parliament's efforts to do so, and that Parliament has what
it needs to do the job it is doing. If you say to me that there
is a need for a parliamentary body, to which you have direct access
in both its role and function, that on behalf of Parliament scrutinises
the state of UK public finances, you are better placed to make
that judgment than I am, and whether that is OBR or not. I think
we are at a moment where you have to make that decision from your
side of the table too, but I do take the point very seriously
that Parliament is ultimately the body to whom the Government
is responsible and whatever you need to do that job better, whether
OBR can assist you in that, that has got to be built into the
Q103 Mr Mudie: Do you not think this
is a time where we should take a decisive step to say, "No,
no, this is not a private agreement between the Treasury and you.
We are Parliament. It should be with Parliament and the Treasury,
and we can both ask the Office to do certain things"?
Mr Chote: You can focus on the
legislation; presumably, you can amend it.
Q104 Mr Mudie: That is what I am
saying. We are looking for your very wise, comprehensive advice.
This is the moment. Would you suggest we take it? You are pretty
doubtful and you are not so sure. What about you, Simon?
Professor Wren-Lewis: I partly
answered your question with this issue about whether the OBR should
be allowed to cost Opposition policies before an election. I would
certainly want the OBR to have the freedom to do what it thinks
is important in fulfilling its remit, not just what the Chancellor
might think. I would perhaps draw a line between the setting up
of a body, which, given the historical way it has happened, is
very much the Chancellor's idea of what he wants to do, and so
he is in that sense involved, but he is setting up what I would
call a public interest body, and so once that process of setting
up is over, the OBR should be serving the public interest, not
the Treasury's interest.
Q105 Chair: Presumably, the logical
position is to give the body a statutory duty to cost policies
if they are presented by a political party to them, and if that
is then triggered, their responsibility would be to comment on
all aspects of them, not just any particular little package that
is handed to them. Do people agree with that?
Mr Chote: The resource implications
of that could be considerable. We are often asked by Opposition
parties to assist in tax policy design, for example, or welfare
policy design. They come to us with ideas and say, "Look,
we are thinking about doing this. Does that sound right and what
would the cost be?" et cetera, and occasionally you get it
from bits of government that do not want to talk to other bits
of government, who ask all sorts of questions. That is a resource-intensive
activity. It would be particularly resource-intensive in the run-up
to an election period and, as I say, the expertise on doing those
sorts of things, unless you want to have the OBR with a sort of
independent group of tax benefit modellers, welfare analysts,
et cetera, as well, you are back to using the same resource that
the Government does to look at those same sorts of policies, i.e.
the people in the Treasury, and that further complicates the relationship
which you described to begin with about the role of Treasury officials
versus this body. I think it would be very desirable for the OBR
to have that sort of role. It would help independence, as I said,
and it would lead to a more informed debate. Having tried to do
some of that from the position where we are sitting, I am conscious
of how much time and flexibility you need to be able to do that.
Q106 Stewart Hosie: Can I just go
back to the forecasting? You made the point earlier that the OBR
is responsible for macro-economic forecasting as well as fiscal
forecasting but the macro-economic outcomes are not only determined
by fiscal policy; they are also determined by monetary policy.
Given there is general agreement, without the Chairman getting
carried away, that there should be this commentary role, would
you seek to comment on monetary policy in the way that you might
seek to comment on fiscal policy?
Professor Besley: I could answer
that partly from my experience on the other side from the Bank
of England. Of course, there we would produce a macro-economic
forecast taking the fiscal forecast as given. There were sort
of rules of engagement that suggested you were fed those forecasts,
you put them through, you did not comment on them as best as possible,
and conducted a forecast for the outlook for monetary policy,
taking fiscal policy as given. One could say that is a very odd
thing to do but it has been done for a period of time, I think,
with a measure of success. Would it be better to have one single
joined-up forecast? There are merits to getting everyone around
the table involved in all aspects of policy and trying to agree
on a grand proposition. I suspect that is rather unrealistic given
that we want to have independent institutions and they serve sensible
functions. So I can see the merits in having a joined-up forecast
but I do not think it is a particular Achilles' heel of this process
that it would have to make assumptions about the conduct of monetary
policy and simply take those as given. Of course, the Bank of
England does not announce what it is going to do in the future,
unlike fiscal forecasts, which tend to be pre-announced, so it
is somewhat more difficult to do forecasts when you are trying
to guess what the path of monetary policy is going to be because
it is unannounced, but I think it could be done; I do not think
it is an insurmountable problem.
Professor Wren-Lewis: There is
a distinction here between having to work out the implications
of monetary policy for fiscal forecasting, which it clearly has
to do, and commenting on whether you think monetary policy is
appropriate or not, and that clearly is not a role for the OBR.
I think on the more general point about forecasting and, in a
sense, it is one of the more unfortunate by-products of having
the OBR very much in this role of producing the post-Budget forecast,
I would try to devote as little resources as possible at the OBR
to the short-term forecast. I would want the short-term forecast
to be pretty close to a kind of consensus forecast because there
are a lot of people doing this activity and I do not think the
OBR is going to have any particular expertiseprobably less
expertise than the Bankat producing the short-term macro
forecast. Its expertise is in working out the fiscal implications
of that and also looking at more medium-term to long-run trends
in the economy, which currently is not done that much. That is
where I think the resources should be, not in terms of the short-term
Q107 Stewart Hosie: The OBR does
these forecasts in terms of the Budget and Government policy.
You are all agreed on this commentary role. I am intrigued at
the resistance. If monetary policy is too tight and it squeezes
credit or if it is too loose and it fuels inflation, or even risks
it, if it is behaving in a procyclical way, which is dangerous,
surely it would damage the forecast and there would be an obligation
Mr Chote: What you have assumed
the monetary response to a fiscal policy change to be was clearly
a difficult issue for the interim OBR to deal with in the pre-Budget
and the Budget forecast. You had some combination of saying, "Well
we have taken into account the fact that the Bank of England will
be responding" and in other areas you may say, "We will
take market expectations for interest rates." That clearly
needs thinking hard about and there are no easy answers to it.
The obvious question now is, if you have this change in fiscal
policy, is that imperilling the economic recovery? Is it threatening
a seriously sub-optimal performance on that front? If you are
producing a macro-economic forecast at the same time as you are
producing the fiscal forecast, you have to have some sort of assumption
as to how the monetary policy is going to respond. You could just
simply make the assumption that monetary policy will not respond,
in which case, clearly, that is an unrealistic assumption and
it would mean that a fiscal consolidation is likely to look more
dangerous to the recovery path than it in fact would be, because
you would expect the Bank of England to adjust monetary policy
so that it is sticking with the path of nominal GDP, nominal activity
in the economy, that it believes is consistent with the inflation
target that it has been given. So you need some sort of balance
whereby the OBR can make a sensible judgment about the way in
which monetary policy might respond, given the fact that it knows
that the Bank of England is going to pursue an inflation target
based on a changed set of fiscal inputs, while at the same time
not being seen overtly to either predict or to recommend what
should happen. That is a difficult balance, and if there is some
sort of way of having a relatively simple rule as an assumption
for how you think monetary policy might respond, that might be
one way there but it is a difficult issue.
Q108 Stewart Hosie: I take what you
are saying is a rule-based system like that would be preferable
to a close relationship with the MPC in the way there is a close
relationship with the Treasury?
Mr Chote: Yes. You do not want
to be going along and having unattributable assumptions about
"The chaps tell us that they are likely to respond in this
sort of way."
Q109 Stewart Hosie: Can I just move
away from that completely to something a little more mundane.
What are the lessons that you have learned already from the interim
OBR of things that were good, and the things that you would want
to do differently?
Mr Chote: What we have just discussed
is one of them, thinking about how you analyse and describe the
inter-relationship between monetary and fiscal policy. I think
the most gratifying thing to have emerged out of the interim OBR
is the enormous increase in the transparency, the amount of information
that is produced on the assumptions that underpin the forecasts,
and so having a forecast for average earnings; apparently it was
inconceivable that the world could survive if we had that published
before. We now have official assumptions for that and the world
has not ended, so that is great. The budget costings document,
I think, the online one, and held by the OBR, is particularly
valuable. The degree to which there is just much more analysis
of why you think a particular policy is going to cost or raise
what it does, which requires you to talk systematically about
how you think it will affect people's behaviour, that is great
and I think much to be welcomed. I think in both those areas you
could go further. As a consumer of Red Books in the past, the
most useful thing you can do is to have a clear presentation of
why the forecast has changed from the last time it was produced
to this, which will reflect a whole variety of factors. It will
reflect the fact that the macro economy has changed, policy has
changed, your assessment of the impact of past policy will have
changed, you may have changed views on the amount of spare capacity
in the economy or view of long-term trend growth, et cetera. As
I say, the key to the credibility of this body in the long term
isSimon calls it commentaryexplaining your working,
why you have said what you have said, what is the empirical and
analytical basis for the judgments you have reached, because people
will disagree with those, and that is fine, but they need to be
able to see how you have got to where you have got, and the more
you can do through transparency and a culture of an assumption
of publication and an assumption of transparency should be hard-wired
in the institution. There will be cases where you cannot make
the full amount of information available, as the HMRC does not
make it fully available to the Treasury, but having that presumption
in the heart of whoever is involved in this would be a good thing.
Q110 Andrea Leadsom: Bearing in mind
the forecasting problems that there are, particularly in the short-term,
is there not a risk that in the fullness of time an unintended
consequence of the OBR being the sole forecaster is that government
starts to blame the OBR for its failed policies?
Professor Besley: In a way, that
is another way of putting a point I made earlier, that if this
is judged by the success of its forecasts, I think we are setting
up an organisation that is bound ultimately to fail, because even
if it has a run of good luck, it will eventually run out of luck
because a lot of economic forecasting is about luck. It is not
about knowing the future. If we knew the future, the world would
be a very different place and we would be engaged in many different
things. The question is unpacking the idea that the OBR got it
wrong when the OBR gets it wrong, understanding why, and whether
it is taking steps to correct its error, because presumably something
has been learned about how the world works that has changed its
judgment. Being both transparent and changing its judgment for
good reasons, that we have learned and moved on and incorporated
whatever we learned into the forward-looking component, is what
makes a successful organisation. It is not finger-pointing around
"You got it wrong." I assume there will be some other
random forecaster at the time who got it right and there will
be attention put on "Oh, X got it right whereas OBR got it
wrong" but they will have equally got it wrong for the random
reason, so I think we need to have a dynamic process of learning
Q111 Andrea Leadsom: I think the
key point here is the implication that government could somehow
abdicate responsibility for its own policy because of the fact
that the OBR is the sole forecaster. What I am getting at refers
to Professor Wren-Lewis's earlier point where he recommended that
this body was a watchdog or a sort of critical friend as opposed
to the only forecaster. Would that not surely be a better solution,
to have a watchdog or a critical friend rather than this sole
forecaster, with all the potential for government to therefore
blame it when things go wrong?
Professor Wren-Lewis: I certainly
think that is an argument, and is certainly one reason why I did
not in my own proposal have this very close relationship in terms
of forecasting. Given that we appear to have got that role, you
can protect the OBR in various ways, one of which, as I have already
said, is to make sure that the OBR is producing a consensus forecast
in the short term, so that if the Government say, "You got
it wrong", the OBR can say, "Well, yes, everyone did."
The other thing in your scenario would be that the OBR would also
be saying "We got it wrong." It would be saying, "Things
haven't turned out right partly because we got our forecast wrong,"
but if it was also turning out differently because the Government
had done some things that perhaps it should not have done, it
would also be saying that. So it would say, "Look, we made
mistakes but actually it isn't just our responsibility; the Government
reneged on some of its commitments." I think transparency
there will help the credibility of the OBR and not allow the Government
to avoid responsibility when it is due.
Q112 Andrea Leadsom: With recent
experience, where there has already been a lot of finger-pointing,
do you not see that this structure, where the OBR is the sole
forecaster, has the potential to just be an endless round of finger-pointing?
Professor Besley: I am slightly
surprised that you say the OBR is the sole forecaster. There are
lots of forecasts out there from different bodies. You mean the
sole forecaster in a Treasury forum?
Q113 Andrea Leadsom: For the Treasury,
Professor Besley: I have some
sympathy with the idea that one would not necessarily want to
completely transfer the forecasting function to OBR rather than
to have the possibility that Treasury and OBR have competing forecasts.
I do not have a problem with that personally.
Q114 Andrea Leadsom: I would like
to know whether you would prefer that. Sir Alan said in his evidence
that they had had about 100 meetings with Treasury officials,
and I asked him, "How many did you have with independent
forecasters?" "None." That, to me, leaves a big
potential for finger-pointing as a sort of institutional issue.
Mr Chote: I think partly that
reflects the timescale over which they had to produce these particular
forecasts, because some of the information that they were dealing
with they obviously could not share with that sort of environment.
I think this raises the fact that one of the issues is what happens
between harvests. I am no agricultural expert but I think the
success of a harvest depends on a lot of hard work put in place
in between harvest times, and one of those would be to engage
with independent forecasters and to explore their thinking and
see how that could inform your own. So, for example, something
we have all been involved in: the Bank of England has monetary
policy roundtables twice a year at which independent forecasters
and City people, academics, are invited in and there is discussion
focused on particular issues of importance at the time: impact
of quantitative easing, likely path of external demand, et cetera.
Having that sort of relationship and drawing upon the expertise
that is outsideyou cannot do all of that and be checking
with 40 forecasters whether you think you are right on the growth
forecast at exactly the same time as you are producing the final
outlook. But that sort of engagement of stakeholdersdreaded
wordshould be an important part of what it does outside
harvest time, and of course, that is also the source of wider
analysis that we think is appropriate. On a big issue that will
remain the case, are we right about the judgments that we have
on trend growth in the future and the extent of spare capacity
at the moment? That is the sort of thing upon which any sensible
OBR is going to want to canvass a wide variety of views. There
is also the potential, I thinkI have argued this in the
pastthat some of the OBR's resource should be used to bring
in people from outside to focus on particular areas of interest
for a while, so it is not just entirely a permanent staff. You
might say, "We think now is a particularly good time to dig
into our forecasting of the financial sector and the feed through
into fiscal policy," and I think the budget should have some
room to bring people in on that. A related issue is whether you
might want to do that with the arrangements for forecasting as
a whole. The Bank of England, when it had its medium-term macro
model, commissioned Adrian Pagan to do a review in 2003, to basically
say, "Is the modelling work we are doing state of the art?"
and some of the conclusions he came up with were reflected when
the Bank moved to BEQM, the quarterly model which succeeded that.
It is very important to be drawing on that sort of outside expertise
both structurally and in looking at the conjuncture but there
is a limit to how much you can do that in the three weeks when
the Chancellor wanders down with a new tax policy that needs to
be put in and you are dealing in that very concentrated harvest
Professor Wren-Lewis: If I can
answer your question, would the OBR be my preferred model because
of its production of Treasury forecasts? No, because it was not
my model that I proposed. Can it be made to work? Yes, I think
Q115 Andrea Leadsom: Can I ask one
very quick question: if each of you you had a clone, would your
clone's application form be in right now for this job and, if
Mr Chote: You want pre-application
Andrea Leadsom: Absolutely. I did say
"clone", not you.
Q116 Mr Love: Anything you say will
be taken down and used in evidence.
Mr Chote: I note what Sir Alan
said about whether he was in a right mind when he agreed, and
that is something I think anybody contemplating this should reflect
on in the still of the night.
Professor Besley: I have recently
returned to Civvy Street, so I think ...
Chair: Treasury Committee fast delivery.
Anything to say, Professor Wren-Lewis? No? Good.
Q117 John Cryer: Transparency has
been mentioned quite a few times, understandably. How do you practically
make the OBR processes transparent?
Mr Chote: There is the issue of
processes and outputs. I think on the outputs, explaining your
working is the key point. You do not want people looking at the
conclusions that you have reached and saying, "Why on earth
have they reached that?" because that creates all the suspicions
about independence that you want to avoid. The more you can do
to spell out the analytical basis, the empirical basis, upon which
you have reached the judgments that you have had and, as I say,
a presumption of transparency, levelling the playing field as
much as possible, so other people can look at the same data and
reach conclusions, which may differ and therefore inform how you
want to think about these things in the future, is a good thing.
As I say, the notion of engaging with other people who have an
interest in the same sorts of analysis, so that they also will
get a sense of ongoing communication, so that they think you are
going at this in an open-minded way and that you are responsive
to a wide range of views, is an important element as well.
Professor Wren-Lewis: I have used
the phrase in a similar context of talking about "active
transparency". I think it is important not just to have somewhere
laid out all the details but to be actively protective of that
information such that, if someone misuses that information, misinterprets
it, then you very quickly and publicly say so. I think it is important
to be actively transparent in that way.
Professor Besley: I would certainly
caution against having too many of the inner workings of this
body revealednot because I think there is anything to hide
but simply because one important part of the process, having been
part of many forecast processes when I was at the Bank, is that
that process is a complicated process in which people make fools
of themselves willingly by trying out ideas on each other. You
would not want that full process that led up to the forecast to
become part of the public record but eventually converging on
and reaching an agreement about a reasoned position, the argument
behind that, the way it was reached broadly, should be spelled
out very clearly.
Q118 John Cryer: I think one of the
reasons that the MPC has been a success is that it has been very
open. The voting records of the members have been published as
opposed, for example, to the European Central Bank, which is a
very closed institution, and I think it is perceived as that by
the public. On the basis that the virtue of the MPC has been its
openness, should not the OBR be open as well so that it can face
the same sort of scrutiny?
Professor Besley: I think the
OBR should be as open as the Bank of England in the sense that
the Bank is very clear in its monetary policy briefings, et cetera,
minutes and so forth, and similar things could be brought forth,
but what the minutes are not is a verbatim account of who said
what to whom. They are an attempt to capture the essence of what
was said at a meeting and to pull together the different themes
in the discussion. Perhaps there could be minutes of the meeting
of the committee that drew this up. Because of the nature of the
exercise here, I cannot see how that could be done effectively
but yes, I think it should be as open as possible, subject to
the constraints of not just putting out loads of material that
people do not want to read.
Q119 Chair: Let us be clear. You
want the OBR to publish minutes of its exchanges with the Treasury
in relation to forecast?
Professor Besley: No, I backed
off from that idea. I said I do not think that is appropriate.
Q120 John Cryer: Sorry. What you
seemed to be saying is what you did not think was a good idea
was to publish a verbatim report. What you seemed to be saying
originally was that a broader report like we get from the MPC
would be more appropriate.
Professor Besley: Yes. That would
be effectively the fiscal policy report of the OBR. In effect,
it would be the reasoned product of the discussions that the OBR
had had. I would not see a need to have another product that was
a separate set of discussions that were summarised, because it
would all, I would hope, find its way into the document that was
the public face of OBR.
Mr Chote: I think you have to
distinguish because with the MPC, the Committee meets once a month
to take one decision, previously on one instrument, now on two,
possibly on three in the future, and therefore having that sort
of person by person transparency, and that individual giving speeches
may be clear about this, and it is clear to some extentit
is how they balance those factors in reaching the decision that
they have which is an easily describable decision. That is quite
easy to be transparent about. You also, of course, have the Bank
producing a quarterly forecast and the inflation report, which
is a combination of a forecast, discussion of uncertainties, lots
of analysis, lots of description, and that is something to which
the Committee as a whole signs up, although clearly some people
are not going to agree with every "i" and "t"
in it. You do not necessarily want to open up the process of how
you actually got to the inflation report. That is somewhat different
from how people have decided to vote on a particular monetary
Q121 John Cryer: Who do you think
should appoint the Chair?
Mr Chote: I think the dual lock
seems a good idea, the Chancellor appointing, and I think this
brings us back to the models of non-ministerial departments versus
NDPB, as somebody said in that report you referred to, the thing
about a non-ministerial department is you have a Minister and
you are not really a Department. I do not think you can really
get away with having the Chancellor not having a key role in this,
but having the Committee playing that role too in the dual lock
seems to be a very sensible one, although it has to be said that
this body should no more be telling this Committee what it thinks
this Committee wants to hear than it should be telling the Chancellor
what it thinks the Chancellor wants to hear.
Q122 John Thurso: Can I ask a couple
of questions on data and models, and perhaps come to you first,
Professor Wren-Lewis. At the moment a great deal of the discussion
is broadly around independence and if it is independent, it is
right but of course, actually, once that independence is established,
its track record will depend on the quality of the work, modelling
and data. How easy is it to fiddle the model to achieve an outcome?
Professor Wren-Lewis: Extremely.
I have spent a large part of my life doing things like that. In
a sense, a model is a means to an end. A model is a way of ensuring
that your forecast is consistent and that it has various relationships
in it that you want. It never dictates a forecast and never should.
Q123 John Thurso: I was struck by
an article in Bloomberg that Danny Blanchflower wrote basically
suggesting that how the Bank arrived at conclusionsI am
not saying I agree with ithow he said you could alter the
end result by the way in which you have created the model. To
what extent is it therefore important that there is complete transparency
in the model and that it is broadly seen by external critics to
be one that is robust, even if it leads inevitably to the wrong
Professor Wren-Lewis: I think
is extremely important. This is an example where I think transparency
can only be good. You would expect the OBR to be completely transparent
about certainly the core model it uses. There may be some details
with particular taxation where there are some sensitivities but,
in terms of the core models you use, you want it to be completely
Q124 John Thurso: Robert, can I come
to you next? Should the OBR accept the data from Departments or
should it be actively obsessing and criticising that before accepting
Mr Chote: I think it should be
deciding what data it needs to do the job it is tasked with doing.
There is an iterative process there about looking at what you
have through the normal channels and then saying, "Well,
actually, this could be done better. We need more, different information,"
or "Is this really being approached in the right way?"
That sort of relationship you have seen in the past with the Bank
of England interacting with the Office for National Statistics,
raising any concerns they may have there, and I think the OBR
would presumably raise similar sorts of concerns if it found,
for example, that it was not getting the information it thought
it needed to be able to validate the social security spending
forecast, to take one example. The OBR should not be at all afraid
of saying, "We want more or different information,"
if it is available.
Q125 John Thurso: But it is important
that the OBR should be able to request in the anticipation of
receiving what it wants rather than being the recipient of what
people may wish to give it? It needs to be able to drive the data
collection that it desires.
Mr Chote: Yes. I am presuming
that happens to a degree with the people who are responsible at
the Treasury now for doing it. Over time they will see that their
need for data changes. I presume there has been a requirement
for much more data and analysis of credit availability than there
would have been if you go back X years, and presumably you then
identify the new sorts of information that you need and you push
for that. To what extent you can define, for example, in legislation
the fact that it has a right to particular datayou, as
drafters of legislation, would be more expert than I would be.
Q126 John Thurso: Would that be a
sensible recommendation, that there should be something in the
Bill that gives them some degree of right?
Mr Chote: Yes: the access to the
same information that the Treasury has available to it. You have
issues there with, for example, the fact that HMRC will not provide
all the taxpayer data it has to the Treasury because of taxpayer
Q127 John Thurso: Once it loses it,
it probably could not anyway.
Mr Chote: I do not think you could
give the OBR a right to avoid that requirement, for example. That
is probably spelt out in legislation for HMRC as well.
Q128 John Thurso: To any of you:
what happens if the Treasury disagreed with the changes in the
modelling, if there was a fundamental disagreement between the
guys in the Treasury and the guys at the OBR? We know that there
are disagreements between people involved in forecasting and modelling.
How should that be dealt with, and what happens if they end up
using different models, or is that not something that you foresee?
Professor Wren-Lewis: I think
the OBR has to be in charge of the model it uses. Obviously, it
wants to be open to criticism and can respond to criticism but
it should not be negotiating with somebody else about what model
Q129 John Thurso: So the decision
on the model must be with the OBR?
Professor Wren-Lewis: Absolutely.
The situation that you posit whereby the Treasury decides that
the OBR model is wrong in some sense, I think basically then it
is up to the Treasury to decide whether it wants to move to an
alternative model or an alternative way of doing things whereby
it produces its own forecast and does not rely on the OBR. In
a sense that is a Treasury decision. The OBR position I think
Q130 John Thurso: You could actually
have quite a benign situation where the OBR had its chosen, open,
published model which it thought was right and the Treasury, for
its own reasons, had another open, published model which it thought
was right and there would be a healthy and dynamic tension between
the two. There would be nothing wrong with that?
Professor Wren-Lewis: Nothing
wrong with that.
Q131 John Thurso: Finally, Tim, the
Bank of England publishes the quarterly model and it gives details
that it has used to produce the MPC's economic projections. Should
the OBR take the same approach and publish everything at the appropriate
Professor Besley: The answer is
yes. On the other hand, coming back to a question you directed
at Simon, I think one cannot exaggerate how much of this is just
the model, reading off numbers and then just writing them down
and publishing them. There is a jot of judgment that goes into
the model. It is important that the modelling tool is there and
available and people can see it, but I do not think anyone should
be under any illusions that that is the sole arbiter or the sole
determinant of the forecast that they reach, any more than Formula
1 cars that are tested in wind tunnels operate on the track in
exactly the same way.
Q132 John Thurso: If it is independent
and there is transparency and everybody understands it, then the
robustness of the analysis is underscored by those two facts.
That is the point I am making.
Mr Chote: It is, but justifying
the judgments that have been applied to it is at least as important,
if not more so, than the precise structure of the model. The Bank
of England has a very niceand I am sure you have all read
it£10 book on the Bank of England quarterly model,
which describes the sort of onion structure: "Here is the
core theoretically coherent model, there is then an additional
layer around that, and then we apply judgment on top of that,"
and it explains how that process works. I do not know whether
the Treasury has ever published anything similar.
Q133 John Thurso: Not willingly,
as far as I am aware.
Mr Chote: That would be a very
nice thing to have, in a user-friendly fashion. This book is not
widely read amongst the general public. Again, this is something
to do between harvests, to be setting out in a reasonably user-friendly
way how you approach the task of thinking about economic forecasting
and economic analysis, and to make that available would be very
Q134 Mr Umunna: I would like to go
back to the appointment process and pick up where I think John
Cryer left off. Obviously, independence and competence are absolutely
key and the Chancellor has put forward a process whereby he puts
forward people, in particular the Chair, and the Chair in particular
is subject to confirmation by this Committee now, and Professor
Wren-Lewis, you have said that you would prefer to have a broader
OBR Committee and for the members of it to be appointed by a board
of the Committee, if I am right, once it is greater in number.
I am struck by something Mr Chote said about people not coming
before this Committee and telling us stuff that we want to hear.
My question to you in particular, Professor Wren-Lewis, is why
do you not think we are up to it, if indeed that is the case?
Professor Wren-Lewis: No, no,
it is not. I think, as I have already said, having a wider committee
which has three executive members but which has people with a
lot of experience, people like Sir Alan is going to become, who
would sit on this more general board, which would not meet that
often but would provide general guidance and certainly not get
involved in the nitty-gritty but would provide that overall general
guidance, would be a very good thing. Once you have got that wider
committee in place, then the question arises whether those non-executive
members of the committee could play a role in the appointment
process for a new Chair, and I think that potential does arise.
You can imagine therefore those non-executive members doing some
of the things which senior Treasury officials are going to do
in terms of the appointment process, doing the initial selection
and possibly the interviewing but I would still want the Treasury
Select Committee to have its veto role. I think that is an important
thing. I think you are very up to that role and I hope I never
said anything otherwise.
Q135 Mr Umunna: You are not just
saying that because that is what we want to hear?
Professor Wren-Lewis: Absolutely
not. What I think would be difficult would be for you as a Committee
to actually do the whole appointment process, from getting in
the applications and sifting through them. I am not sure that
is something you would want to do.
Q136 Mr Umunna: One of the things
that I am struck by, and in particular I was watching your almost
physical reaction to George Mudie's question about actually whether
the relationship between the OBR should be one between the OBR
and Parliament as opposed to it just being one with the Treasury,
which by its nature was taking you into a political arena, and
I could see you all slightly recoiling at this as you were being
drawn into the political arena. Do you think that is going to
compromise the volume of people who are likely to put themselves
forward for this role, the prospect of being drawn into the political
arena in the way that, frankly, Sir Alan has since the birth of
the OBR? There has been a lot of talk about it being set up in
May and, of course, actually it was set up in shadow form and
was born by press release from the Conservative Party in December
of last year. Do you think there is going to be a problem here
in terms of the quality of candidate you have coming forward?
You all see yourselves as economists, and do not really see yourselves
as political operators, but I am not sure how possible it is for
anybody to avoid being drawn into the political arena when they
hold such a sensitive and important role. That is actually a question
to all of you.
Mr Chote: An awful lot of the
judgments that are made are going to inform very politically sensitive
debates and discussions, the pace of fiscal consolidation being
perhaps the most obvious amongst them. If it does deter anybody
from being involved because of the knowledge that they will get
in those sorts of areas, it is probably a good thing. If people
are going to engage in these sorts of debates, you really want
them to be doing so intentionally rather than unintentionally,
and it is clearly one of the attributes that you will be looking
for in the team. I think there is an interesting point about the
mix of people in the three-person Budget Responsibility Committee.
You do not want three identical people; you want a mix of skills
there, and obviously those people, as has been graphically demonstrated
over the last few weeks, are going to need to feel comfortable
working in a potentially politically difficult environment. It
is not impossible; you have to be very clear about what you see
as the appropriate role and what is not, and explaining why you
have reached the judgments that you have. In the IFS we hope and
believe that our analysis is based upon good rigour, good evidence.
Clearly, people will disagree with it, perhaps because they disagree
with the analysis or because it does not come up with answers
that are particularly politically convenient, but that does not
absolve you of reaching those sorts of judgments and presenting
them and explaining them and defending them to anybody who, perfectly
reasonably, takes a different view.
Professor Besley: In some ways
I think it is helpful that the difficulty that Alan Budd had recently
came into the public domain so quickly, because I think anyone
who takes on this job now is going to be aware of the kinds of
issues they may be drawn on to deal with but I think one possibilityand
this is something on which I will present some written evidenceI
would stress is to have some kind of small pro bono board,
a little bit along the lines of what Simon was saying, that in
a way helps to protect the Chair when independence is under threat,
to give a small body of advisers.
Q137 Mr Umunna: Advisers to the Chancellor,
if you like?
Professor Besley: Yes, and some
kind of protection. I am sure if, for example, Robert were ever
under fire, there is a very distinguished board of trustees of
the IFS that would come to his aid.
Q138 Mr Umunna: Do I take it that
you think the current Chair has been left exposed? Do you think
he has not necessarily been provided with the support that somebody
in such a sensitive new role should have been provided with?
Professor Besley: I would say
he was a victim of circumstance. This was a job that he was thrust
into, he was asked to do many things under a very tight timetable,
and I would not especially describe him as having been exposed.
My colleagues may think differently.
Mr Umunna: Do you think he was wise to
accept the appointment before the general election? I suppose
I just think of the way the MPC was set up and actually nobody
really knew that was going to exist until just after the election
in 1997. I wonder whether it was wise to have got involved with
a body in shadow form.
Q139 Chair: We are concentrating
on the new body now so if we could have one-word answers, or written
answers if you want to provide one. I would like to concentrate
on the structure of the new body.
Professor Wren-Lewis: Not to answer
that last question but in terms of would the very public role
of the Chair of the OBR deter some people, I think the answer
is probably yes, but part of the role of the Chair of the OBR
is to be a very public figure, and you want someone who is comfortable
with that and comfortable about making political, with a very
small "p", judgments about when to intervene and when
not, and I think that is inevitable.
Q140 Mr Umunna: What do you think
in terms of the actual technical attributes of the person? What
do you think we should be looking for when the prospective new
Chair is put before us and we are asked to confirm their appointment?
Mr Chote: As I say, I think you
should be thinking about it in terms of the three people and the
mix of skills that you have there. The first threeand I
think this is quite a sensible structureyou clearly have
somebody of the two deputies who is relatively focused on the
macro side and somebody who has had in-depth experience of the
fiscal forecasting, conditional on the macro forecast. You can
imagine you want lots of expertise in those sorts of areas. You
need demonstrable independence, you need a focus on effective
communication, et cetera. Quite how you mix that in terms of whether
you look for three people who combine all of those attributes
or where you see the most important bits of those lying I think
is one entanglement of having a pre-appointment hearing for one
and commencement for the other. In a sense, in an ideal world
you would take a view on the group of people as a whole and whether
they bring that right sort of mix together rather than putting
all the emphasis on who happens to be the Chairman.
Q141 Mr Love: Earlier on you mentioned
engagement and you gave us an illustration of the twice yearly
meetings that the Bank of England hold. Currently the Treasury
has an observer on the MPC. It is a formal role. Do you see the
Office having that sort of structured role in the Civil Service
or do you think they need to stay a little disengaged?
Mr Chote: Should they have a representative
on the MPC?
Q142 Mr Love: I am only using that
as an illustration. You can comment if you like on whether they
should have a role there but I was really just thinking about
whether they should be in the formal structures of the Civil Service
in that way or whether they need to draw back and show a little
independence from the Civil Service.
Mr Chote: I think in terms of
many of the staff, you are going to want to have Civil Service
contracts because people are not going to make a life's career
in the OBR; they are going to move, I presume, from different
economic functions across government, and that is a good thing
and it constantly refreshes the human capital of the organisation.
So I think in some sense you need to have some members of staff
who are civil servants but, at the same time, as I say, you want
to be bringing in outside expertise. There will be people who
want to work for this body, and maybe they have come from the
private sector or the academic sector and they are working for
this and they are not intending to go into government at all,
so a mix of people I think would be right. I guess in terms of
a formal role in the Civil Service, again, you are taking me out
of my comfort zone on whether a non-ministerial department is
headed by somebody who is automatically part of the Whitehall
machine of Wednesday Permanent Secretary meetings, et cetera.
I presume that is not something that this person would want to
get involved with but I do not know whether it is a requirement
if this thing is set up as a non-ministerial department, which
seemed to be Alan's preference, and judging from the other bodies
that are NMDs, it looks like the most obvious match to me, but
I claim no expertise on that. Whether that necessitates some involvement
in the Civil Service more broadly, ideally, I think, in terms
of independence, that would not be the case but I do not think
it would be a life or death issue.
Q143 Mr Love: Professor Besley, what
do you think? You have sat on the Monetary Policy Committee. Just
taking that as an example, would there be benefits to the OBR
from having that observer function or do you think it would compromise
their independence to be that closely involved with other parts
of the forecasting machinery, if I can put it that way?
Professor Besley: The piece of
it where I imagine there is more fruitful ground for co-operation
between OBR and the Bank is during the forecast round but actually,
during the forecast round is the time where the Bank does not
have Treasury input; it is only at the formal MPC meetings, and
actually, contrary to something that came up in one of your earlier
hearings, in fact, where it was suggested that even during forecast
rounds members of the MPC only meet for the meeting, just as I
think the OBR has been meeting intensively during its forecast,
the MPC meets much more intensively during the forecast round
and has a number of sessions, but they are not part of the formal
process, meaning they do not have Treasury representation there.
Whether the level of co-operation there should be between staff
of the Bank and staff of the OBR or members of the OBR Committee
and members of the MPC, it is not entirely clear to me would be
most fruitful at the level of OBR Committee members and MPC members
but my guess is that there would be some fruitful communication
that takes place around that time, depending on how synchronous
was the process of the forecast round at the Bank and the forecast
round that the OBR was doing, because a lot of the same issues
are going to be debated and discussedthe comparison with
outside forecasters which has come up gets discussed during the
forecast round at the Bank and so forth. So I would have thought
there ought to be a good level of co-operation that takes advantage
of the fact that they are engaged in similar processes, but I
would not formalise it particularly in any legislative sense myself.
Q144 Mr Love: We have talked a lot
about the scope for the membership of the Committee, in particular
the Chair who is appointed. How prescriptive should we be in terms
of setting down what it is the Committee and the Chairman are
allowed to do? Should we be very prescriptive or should we leave
it entirely, only saying that fiscal sustainability is your objective
and leave the Chairman and the Committee to make that judgment
about what they get involved in and what they do not?
Professor Wren-Lewis: I think
the post has to have some broad outlines of what it is meant to
achieve but I think there is a danger of being too prescriptive
in preventing the Chair of the OBR from doing things which allow
him to fulfil that remit. So I would not be too prescriptive.
I think you would want to give the organisation sufficient clout
that it is able to do what it wants to do. We have already talked
about being able to go to the Treasury and say, "We want
to see all this information" and have a right to see information.
You want to make sure that it has those rights but I think it
would be dangerous to go too far. Take the issue of sustainability.
We certainly know what is not sustainable, which is a path of
debt which is just getting bigger and bigger over time. That is
clear but going beyond that is much less clear, and so in a sense
the concept is sufficiently vague that it is very difficult to
be too prescriptive about it and probably a mistake to try and
be too prescriptive about it.
Q145 Mr Love: Mr Chote, in terms
of how prescriptive we should be, of course, the argument could
be used that it is an unequal relationship between OBR and the
Treasury, and that if the Treasury gets very heavy with the new
Chairman, it would be helpful to him or her to be able to look
and say, "This is what my role is intended to do," so
being prescriptive might actually help. Is that an argument for
being more prescriptive?
Mr Chote: It is an argument for
being very clear, as clear as you can be about what you see the
task to be. The difficulty, as we have discussed, is actually
being able to define in advance exactly what it is you think you
are going to need to know and to look at in order to reach the
judgments that are necessary to reach the judgment on what you
are finally left with. I think I would agree with Simon. I think
it is hard to be too prescriptive. You want to be clear about
what this body is there to do but it is very hard to spell out
in detail to begin with what in all future states you think it
will need to think about and to analyse in order to fulfil that
Q146 Jesse Norman: Going back to
the question of disagreement between the Chancellor and the OBR,
is it really a good idea to have the Chancellor able to draw on
a lot of additional expertise directly within the Treasury? Does
that not simply replicate the problem we have at the moment? Is
not the point that the OBR is his creation and he is going with
it or he is reaching a political judgment or another judgment
but not one based on Treasury expertise as such?
Professor Besley: I would sort
of hope there is sufficient dialogue across institutions to help
to resolve the vast majority of cases where this could be an issue.
I think it is hard to think in the abstract and view what the
nature of the disagreement was and getting to the bottom of that
would hopefully resolve many of the issues. I find it quite difficult
to respond without thinking of the concrete example that would
be at stake in a particular case, how easily it could be done.
Chair: Thank you very much, all three
of you, for your oral evidence today and also for the written
evidence. If you want to put more in, please do. This body and
its structure is clearly in a state of flux and we have an opportunity
to influence it. If you want to add a CV for a job application,
we are fully prepared to consider it. Thank you very much indeed.