House of Commons - Office for Budget Responsibility

Office for Budget Responsibility - Treasury Contents

4 Independence

The importance of independence

86. Our witnesses all stressed the importance of the OBR being independent and being seen to be independent. Sir Alan Budd was emphatic in his belief that the interim OBR had achieved complete independence from ministerial involvement in the production of its forecasts. In his view "That is what matters and it is essential that that is achieved and demonstrated to be achieved."[78]

87. There has, however, been scepticism about the OBR's independence in some quarters since it was created, particularly following the controversy regarding public sector employment forecasts in early July 2010.[79] As Dr Kopits indicated in his evidence, the substance of these concerns are less important than the fact they exist:

there cannot even be a scintilla of doubt in the eyes of the public about the OBR's independence and impartiality, as negative perceptions may undermine the OBR's reputation from the outset, requiring a major effort at changing such perceptions. It is for this reason that the recent editorials and comments in major newspapers expressing suspicion—regardless of the facts—about the impartiality of BRC need to be addressed in the statute enacting the OBR.[80]

88. A substantial challenge to ensuring that the OBR is both independent and seen to be independent is the potential conflict between its two roles: on the one hand a watchdog for fiscal sustainability and on the other providing the forecast the government will use to draw up the Budget.[81] This is intimately connected to the issue of staffing and resources, which we have already examined. In this chapter we focus on the structure, powers and constitutional status of the organisation.

Status

89. As the Institute for Government (IfG) has indicated, the different structures of arms-length public sector bodies are a complex and confused area. There are nearly 800 such bodies, divided into at least 11 categories.[82]

90. Witnesses differed on what they considered to be the appropriate status for a permanent OBR. Broadly their suggestions fell under three headings: a non-ministerial department, an independent public interest body, and a Parliamentary body:

The most relevant example of a non-ministerial department is the UK Statistics Authority (UKSA). The UKSA was established by the Statistics and Registration Services Act 2007. Ministers are responsible for the statutory framework within which the UKSA operates. However, the Authority reports directly to Parliament on the exercise of its functions, primarily through the Public Administration Select Committee (PASC). Unlike most non-ministerial departments it does not report to ministers. The Chair of the Authority is subject to a pre-appointment hearing by PASC.[83] While Ministers do not control the Authority or clear its publications they act as a conduit for formal communications with Parliament.
An alternative model was suggested by the IfG. They suggested a rationalisation of arms-length bodies into four categories: constitutional bodies, independent public interest bodies, departmental sponsored bodies and executive agencies. They proposed the features of a public interest body as being the most suitable for the OBR. These features are: Parliamentary approval rights in relation to appointments, direct accountability to Parliament for decisions taken with its statutory framework and Parliamentary protection for its budget and from governmental override of its decisions.[84] Sir Alan Budd endorsed the features of the Institute's model in his evidence to us.[85]
The third option is that of an Independent Parliamentary Body, along the lines of the Electoral Commission or Independent Parliamentary Standards Authority. This body could be directly accountable to Parliament through a parliamentary Committee, which would answer to the House as a whole for its activities. Its budget would be set by an appropriate House of Commons body rather than the Treasury.[86]

91. As Professor Flinders observed, the appropriate status of the OBR is closely related to its remit. An independent parliamentary body would be well suited to an OBR whose role was that of an external fiscal watchdog.[87] However, it is difficult to reconcile this model with an OBR whose primary functions include developing forecasts for government in order to inform decisions taken by government. While we are drawn towards clarity of the model proposed by the Institute for Government, we accept that the model chosen for the OBR may well be a hybrid, designed to ensure the organisation's independence, while allowing it to work closely with the government on the forecast, and minimising duplication of functions. The body should have the maximum independence possible. It should operate from offices outside the Treasury and have its funding secured by the measures set out in paragraph 112. We believe the best structure for this would be to have the OBR established as a Non Ministerial Department. The Statistics Authority offers a useful model of how such a department can function. It is roughly the size we envisage for the permanent OBR (or even smaller), with 27 staff—23.6 full time equivalents. While a Non Departmental Public Body could be established in ways which maximised its independence, it would appear to be linked to the Treasury because of the Estimates process, and there would be inevitable doubts about its independence.

Structure

92. The interim OBR was headed by a Budget Responsibility Committee, consisting of the Chairman and two members, one with a macroeconomic background and one with a public finances background. The advice from the interim OBR endorsed this model and it is to be adopted for the OBR in the near term, although the contents of the legislation are not yet known.[88]

93. Robert Chote endorsed having one macroeconomic forecaster and a fiscal forecaster, but he also stressed the need for the BRC as a whole to have effective communication skills and political awareness.[89] NIESR stressed the importance of at least one BRC member having direct experience of fiscal forecasting, to ensure its ability to challenge the Treasury.[90] In contrast, the ICAEW suggested that "to avoid group-think" the OBR should contain "at least one individual who is not an economist, but has expertise in public finances, accountancy and fiscal sustainability issues.[91]

94. We agree with the Government's assumption that the BRC should have three executive members, including its Chairman, reflecting the balance of skills required to undertake the OBR's functions. Although it will be essential for the Committee to contain respected economists, as the ICAEW suggests, other skills may also be appropriate. While the organisation will not have any direct political role, the BRC should have sufficient political awareness to avoid involvement in political controversy.

95. Whilst there was general approval for the three-person BRC model, some witnesses wanted it to be subject to the scrutiny of non-executive board members. Professor Wren-Lewis argued for a larger, supervisory board, comprising non-executive members with experience in the OBR's areas of expertise. On Professor Wren-Lewis' model this board would provide a supervisory function and could undertake the appointment process for the BRC Chairman.[92] Professor Besley supported this approach, suggesting that such a board could offer some protection to a future OBR Chair who became drawn into political controversy.[93] Professor Flinders suggested that at least one board member should be recruited from outside the United Kingdom or have international experience of fiscal forecasting.[94] A comparable structure might be the UK Statistics Authority, which has a board comprising three executive members and four non-executive members.[95]

96. The permanent OBR should also have a small group of non-executive directors, containing two or three people working on a pro bono basis, with a senior non-executive director, drawn from those with considerable experience in relevant fields, such as the Treasury forecasting, the Bank of England or the private sector, and at least one should have had some forecasting experience. Previous political experience should not necessarily be a bar to appointment.

97. The non-executives should not be involved in the forecasting process. Their primary role should be to safeguard the independence of the OBR and they should have a duty to warn this Committee of anything which appears to threaten that independence, including any questions about resources. They should be available to advise to the Chair and members of the BRC, and, if necessary, the Treasury Committee.

Appointment and dismissal

98. Sir Alan Budd told us that the independence and quality of people appointed to the BRC would be crucial to establishing the OBR's credibility, especially early in its existence when the organisation does not have a long track record behind it.[96]

99. The Chancellor of the Exchequer proposes that the Chair of the BRC will be appointed on a five-year term, renewable once. In evidence to us on the June Budget, the Chancellor told us the appointment would require the agreement of this Committee. In that evidence session we pressed him as to whether the Committee would have a veto over the dismissal of the Chairman of the BRC. After initial hesitation, the Chancellor has accepted that he should only be able to dismiss the Chairman in exceptional circumstances and with the agreement of this Committee.[97]

100. Other members of the BRC will also be appointed on five-year terms, renewable once. The Chancellor proposes that these posts should be subject to pre-commencement hearings by this Committee, similar to those undertaken for Monetary Policy Committee members.[98]

101. The Chancellor's proposal to give a Committee a veto on an appointment is, to our knowledge, unprecedented. The idea was broadly welcomed by our witnesses.[99] However, Professor Flinders raised a number of concerns, including the implications for other appointments. In particular he argued that too close an involvement by this Committee ran the risk of politicising the appointment, particularly where there was disagreement between the Chancellor and Committee on an appointment. He cited the political fallout following the recent pre-appointment hearing for the Children's Commissioner as an example of the possible dangers. He was of the view that members of the BRC should not be subject to a hearing by this Committee.[100]

102. We understand the risks of politicisation raised by Professor Flinders. However, these risks are lower in a situation where the appointment can only go ahead on the basis of a consensus between the Government and this Committee. In the case of the Children's Commissioner, the political fall-out resulted primarily from the then Government's decision to press ahead with the appointment despite the Committee's opposition to it.

103. Several of our witnesses stressed the importance of the BRC having a range of skills sufficient to cover its remit and perform its duties effectively.[101] Indeed Robert Chote suggested that the hearings should look at the BRC as a whole, rather than individual members.[102]

104. This Committee has successfully established a process of hearings for Monetary Policy Committee members by restricting its judgement to the preferred candidate's personal independence and professional competence. We consider that to avoid the politicisation of the BRC's role, candidates should be judged against clearly defined criteria. We intend to use the criteria of personal independence and professional competence as the basis for our hearings with BRC members.

105. In evidence the Chancellor told us that if we thought it appropriate, the Committee's power to veto a candidate:

will be put in the statute which I propose to present to Parliament later this autumn because I want there to be absolutely no doubt that this is an independent body, that this person has the support and approval of the Treasury Select Committee in undertaking that work, that they come here to give evidence.[103]

106. There is a risk that rejection of a candidate could precipitate a crisis. One way to reduce both that risk and the risk of politicisation would be to give the Committee Chairman and the senior member from the largest opposition party[104] the right to some involvement in recruitment, including the right to ask questions, but not to vote. Such involvement would mean that the two Committee members would be able to brief the Committee on the successful candidate's credibility, and reduce the risk that a well qualified candidate might be rejected by the Committee. It would also give the Chancellor and the Committee early warning if a particular candidate was likely to be regarded with scepticism by the Committee. The Committee should also have access to the successful candidate's application papers, on a confidential basis, and this should be made clear when the post is advertised.

107. We support the Chancellor's proposals for a "double lock" on the appointment and dismissal of the OBR Chair. We should also have the right to veto other BRC executive members proposed by the Chancellor.

108. While we welcome a statutory role for the Committee in the appointment and dismissal of the Chair of the Budget Responsibility Committee, the relevant provisions will have to be carefully drafted to ensure that the legislation does not purport to dictate parliamentary proceedings, or expose them to judicial review.

Finances and back-office support

109. The Statistics Authority told us that "on grounds of financial economy and efficiency, the Authority shares various IT, finance, procurement and human resource systems with the ONS". We do not object to the OBR operating a similar fashion. However, the OBR needs to have full control over its communications, and this function should not be shared with the Treasury press office.

110. The OBR needs to have enough resources to carry out its statutory duties well, but not so many that it increases the sophistication of its work with diminishing marginal benefit or uses its discretion to expand the scope of its work beyond its statutory remit and the views expressed in this report. In addition it is essential that the Treasury should not be able to starve the organisation of resources, either through restricting its ability to draw on Treasury resources during the time of the forecast, or through restricting its funding. The OBR's budget should be set on a rolling five year basis.

111. It is possible that the OBR will feel at some stage that it does not have enough resources. If this were to happen, we propose that the OBR should first get an outside opinion on the reasonableness of its existing costs and the benefits that additional resources would make possible. It should also seek the views of the non-executive group one of who would need to have had experience of economic analysis and its costs. It would then report the results of this consultation in writing to the Treasury and to us.

112. If the OBR is not to be a fully Parliamentary body, it needs transparency in the resources it is given, and the House needs to know the Government's proposals in time for intervention to be effective. To that end we recommend:

the OBR budget should be given its own line in the estimates;
that budget, accompanied by an explanatory memorandum prepared by the OBR itself, should be sent to the Treasury Committee in confidence at least six weeks before the Estimate is laid.

These measures will allow us to ensure that the BRC and the non-executives are content with what is proposed. They should have a duty to raise any concerns they have with the Committee.

Relationship with the civil service

113. If the OBR is to be a small organisation, with some links to the Treasury, at least in terms of drawing on Treasury staff to make the forecast, then there is merit in the staff of the organisation being civil servants, although members of the Budget Responsibility Committee should not be. Although we think it is essential that the OBR should have its own ethos, it would be unrealistic to expect that many people would wish to make their entire careers there. Not only will it begin by importing those Treasury officials responsible for coordinating the forecast, the Treasury is likely to have a pool of expertise which the OBR may wish to draw on in the future. Moreover, the Treasury itself could benefit from staff who had experience of working within the OBR. Classifying OBR staff as civil servants would make such interchange easier.

114. Although there is a case for the staff of the OBR to have the status of civil servants, and we accept that initially many of them will be drawn from the Treasury, the staff of the OBR should not be restricted to career civil servants. We would like it to draw expertise from many different sources. Dr Kopits told us:

in Hungary, open recruitment by the FC over a three-month period resulted in a substantial staff, drawn from the private sector (including academic professionals), the central bank, and government (including the Finance Ministry). It has been truly surprising the speed at which these young professionals (aged between early 20s and early 40s) have been ready to produce solid analytical work[105]

115. While we accept that there is a case for those employed by the OBR to be civil servants, we consider that the OBR should have sole responsibility for hiring and firing its employees. Although many of its staff may come from within the civil service, it should draw its staff from as wide a range of sources as possible.

116. Even if the OBR has control over those who work directly for it, nearly 100 people within the civil service will be involved in drawing up the forecasts. There need to be structural assurances that the officials who remain in government are giving the OBR full and objective advice, and cannot be subject to pressure from the Treasury or other departments. First, their annual appraisals should contain an explicit OBR comment on the way they have performed their forecasting tasks. Second, such officials should have the duty to raise any concerns they have with the BRC or with the non-executive board, just as civil servants generally have the right to raise matters with the civil Service Commissioners. If there were widespread concerns about the objectivity of the data or advice fed into the forecasts from within Government, we too would expect to be informed and we would not hesitate to intervene.

Formalising the relationship

117. Although the measures above should do a great deal to ensure that the OBR has the power and resources it needs, the relationship between the OBR and government departments should be set out clearly in formal memoranda of understanding between the OBR and departments it deals with: those memoranda should make it clear that during forecasting periods the OBR has the right to control the forecasting resources of government and that such staff have a duty to give the OBR full and objective advice.

118. The Ministerial Code requires Ministers to "be mindful of the Code of Practice for Official Statistics, and notes that observance of the Code is a statutory requirement on all organisations that produce National Statistics in accordance with the provisions of the 2007 Act". The Ministerial Code should be amended to require Ministers to respect the OBR's independence and to note that during the forecasting periods the OBR has the right to control the forecasting resources of government.

The role of the NAO

119. At the time of the Budget, the NAO produced an "Examination of the forecasts prepared by the interim Office for Budget Responsibility for the emergency Budget 2010".[106] This was because the Finance Act 1998 gave the NAO the task of examining and reporting on conventions and assumptions underlying the fiscal projections submitted by the Treasury for examination. As the Comptroller and Auditor General said:

Until there is a statutory basis for the new arrangements, my duties under the 1998 Finance Act remain. To reflect the interim arrangements, the Chancellor has requested that I undertake an examination with the following scope:

To consider whether key economic and fiscal assumptions underpinning the interim Office for Budget Responsibility's forecasts were independently arrived at.[107]

The legislation establishing the permanent OBR will have to deal with the organisation's relationship with the National Audit Office. We consider that the establishment of the OBR means that provisions of the Finance Act 1998 requiring the NAO to audit budget assumptions are no longer necessary. However, the OBR should be subject to the same sort of NAO scrutiny as any other part of government.

78 Q 74 Back

79 See para 124 Back

80 Ev w17, para 11 Back

81 Q 1 [Sir Alan Budd]; Ev w20, para 1 [Professor Matthew Flinders] Back

82 Ev w1, para 4 [Institute for Government] Back

83 Ev w4, para 1, and Ev w5, para 7 [UKSA]; Back

84 Ev w2, para 2 [Institute for Government] Back

85 Q 37 Back

86 Ev w22, para 1 [Professor Matthew Flinders] Back

87 Ev w21, para 4 [Professor Matthew Flinders] Back

88 Ev w30, para 7 [Chancellor of the Exchequer] Back

89 Q 140 Back