Office for Budget Responsibility - Treasury Contents


Examination of Witnesses (Questions 79-146)

PROFESSOR SIMON WREN-LEWIS, PROFESSOR TIM BESLEY AND MR ROBERT CHOTE

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, greater—not 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 about—the number of people who spend a relatively small amount of their time on the harvest—and 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 OBR—and I think it certainly has to be more than three—which 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 perception problem.

  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 functions—I 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 forecasting—we do not—have 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 time—it is a small point but I will make it—that 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 clout."

  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 OBR—perhaps this would be relevant only around election time—was 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 policies—and I do not know whether this has happened under this Government, as it did under the last one—is 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, do-it body?

  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 wary—we have certainly taken this approach at the IFS—that 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 implications.

  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 interpreted—that 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 Parliament—would 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 relationship?

  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 structure.

  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 expertise—probably less expertise than the Bank—at 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 forecast.

  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 to comment.

  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 is—Simon calls it commentary—explaining 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 from mistakes.

  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, yes.

  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 outside—you 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 stakeholders—dreaded word—should 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 think—I have argued this in the past—that 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 period.

  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 it can.

  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 so, why?

  Mr Chote: You want pre-application hearings now!

  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 revealed—not 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 extent—it 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 policy decision.

  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 conclusions—I am not saying I agree with it—how 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 answer?

  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 transparent, yes.

  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 it?

  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 data—you, 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 confidentiality issues.

  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 it uses.

  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 is clear.

  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 moment?

  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 nice—and 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 desirable.

  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 possibility—and this is something on which I will present some written evidence—I 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 three—and I think this is quite a sensible structure—you 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 discussed—the 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 core function.

  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.





 
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