Conclusions and recommendations
The Interim OBR
1. The
interim OBR produced a Pre-budget report and a Budget report in
a very short space of time. It has increased the transparency
of the forecasting process. Members of the Budget Responsibility
Committee came to give evidence to us twice, and were exemplary
witnesses. We wish to put on record our appreciation of the interim
OBR's work, and, in particular, of the leadership given by Sir
Alan Budd, Geoffrey Dicks and Graham Parker. (Paragraph 8)
Independent forecasting
2. The
MPC has a clear policy objective, with a measurable target and
control of the instruments to achieve it. If the inflation target
is breached, the Governor has to explain to the Government, the
Treasury Select Committee and the public. In contrast, the OBR
provides a forecast and commentary; it has no responsibility for
policy on which it comments or which its work may influence internally.
This requires the exercise of particular care and restraint by
the OBR. (Paragraph 12)
3. The previous Government
wished to improve monetary policy-making by giving control of
interest rates, within a policy framework set by Government, to
an independent Bank of England: the current Government aims to
improve fiscal policy making by giving responsibility for forecasting
to an independent body. It is a bold step. However the MPC has
a clear task and controls the means to achieve it. The OBR has
a more complex relationship with government. (Paragraph 13)
Independent fiscal councils
4. The
Government has taken a significant step, which is not without
risk in seeking to give an independent body responsibility for
the forecast. Official forecasts may influence expectations. The
benefits of surrendering control over the forecast can only be
achieved if the OBR's independence is beyond doubt and its competence
is established. The OBR will have to demonstrate a commitment
to transparency, objectivity and impartiality over a sustained
period if it is to command and retain public confidence. (Paragraph
23)
5. In this Report
we examine some of the ways in which the independence of the OBR
can be fostered, but one key factor, for which it is impossible
to legislate, will be the quality of the organisation's people,
and of the work they produce. The interim OBR, led by Sir Alan
Budd, made an excellent start on which the permanent body can
build. (Paragraph 24)
6. There is no "correct"
model for an independent fiscal council; each arrangement will
have its own advantages and drawbacks. In this Report we do not
conduct an exhaustive examination of the various ways in which
a fiscal council could be structured but focus on the Government's
proposals and how they can be made to work. (Paragraph 28)
7. The OBR's contribution
to the formulation and improvement of public policy will be made
through the substance of its work, which over time, can contribute
to greater public confidence in fiscal policy making. It must
avoid the trap of convincing itself (and consequently convincing
the general public) that it or any other body has a monopoly of
wisdom on short term forecasting, which is an inherently uncertain
process. The OBR can only be effective if it is independent. Our
proposals are designed to strengthen the OBR's independence, and
the perception that it is independent, notwithstanding its involvement
in drawing up the Government's forecast. (Paragraph 29)
8. The OBR should
avoid being drawn into seeking to apply political pressure through
its commentary—even though many commentators will encourage
it to do so. The OBR is not, and should not be, running fiscal
policy. (Paragraph 30)
9. This Committee
will have a key role both in holding the OBR to account and in
upholding its independence. The NAO audited OBR independence at
the time of the Budget and identified the following criteria by
which the independence of the judgement underlying the forecasts
could be judged:
- The Budget Responsibility Committee had full
discretion over the scope and nature of its judgments on the forecasts.
- The interim Office for Budget Responsibility
had unrestricted access to the necessary data and analysis.
- The interim Office for Budget Responsibility
had control over sufficient resources to consider the evidence
and form a robust judgment.
- The interim Office for Budget Responsibility
effectively scrutinised, questioned and challenged the information
and advice it received.
- The Budget Responsibility Committee formed its
judgments independently of any views of officials or Ministers.
- The Budget Responsibility Committee had autonomy
over the content of its published reports and the means of dissemination.
We consider that these criteria provide an excellent
foundation by which to judge the future OBR, and will bear them
in mind in our future work. (Paragraph 31)
10. In this Report
we have started from the framework proposed by the Chancellor:
the OBR will be a new body, and it is reasonable to see whether
those arrangements can be made to work. However, given the lack
of institutional experience of bodies such as the OBR, and the
range of views on the matter, we consider that the arrangements
adopted for the permanent OBR should be subject to comprehensive
review no later than five years after it is established by statute.
(Paragraph 32)
11. The review should
include an assessment of the OBR's performance, remit and institutional
accountability arrangements. In particular, we believe that the
review should consider in the light of experience the case for
the OBR becoming a Parliamentary body with its resources determined
by a House of Commons body, such as the Public Accounts Commission.
(Paragraph 33)
12. This review should
be carried out by a small team of external experts, possibly commissioned
by the National Audit Office, and should report to us as well
as to the Chancellor. This Committee should be consulted both
about the scope of the review and about the arrangements for carrying
it out. (Paragraph 34)
Forecasting
13. One
of the ways in which we will judge whether the OBR is a success
is whether there is greater public understanding of the purpose
and limitations of the forecasting process, and realistic expectations
of what it can deliver. (Paragraph 38)
14. There should,
and will certainly, be analysis of the accuracy of OBR forecasts.
Their quality and authority can be measured over time, relative
to other forecasts. Absolute accuracy is not a useful criterion.
Persistent pessimism or optimism will become apparent over time,
justifiable on the basis of published explanations and methodology.
(Paragraph 39)
15. The legislation
establishing the OBR should not require future governments to
use OBR forecasts. It is possible that the power of the Government
to use its own forecasts will counterbalance any incentive the
OBR might have to be overly pessimistic. The OBR's reputation
would suffer if it were shown that its forecasts were so significantly
biased that the Government no longer considered them a reasonable
base for policy-making. However, it would be a major step for
Government to do this. Once the decision had been made, the OBR's
credibility would be severely, and possibly terminally, damaged.
(Paragraph 41)
Control of models and data
16. The
OBR should have discretion in the models it uses in drawing up
its forecasts. It is a matter for the organisation itself as to
whether it is content to use the Treasury models, or wishes to
make changes. Whatever course the OBR takes, there would be benefits
in it being as transparent as possible about the models it uses.
The OBR should also be cautious about attempting to increase the
sophistication of the model in search of dubious increases in
accuracy. As many witnesses pointed out, a sophisticated model
cannot remove the need for forecasters to exercise their judgement
and incremental benefits to an already highly complex model may
be nugatory or perverse. (Paragraph 44)
17. The OBR should
have the power to check the quality of fiscal data itself, and
to request that the ONS does so. It should also be free to use
any existing data it thinks fit in constructing the forecast,
and to recommend changes in data collection, if it considers that
this would improve the forecast or its ability to assess the likelihood
of achieving the fiscal mandate. Where a recommendation may increase
the overall cost of the OBR's work, it should be required to seek
an external view on the benefits and costs of the change, and
report this to the Treasury and to this Committee. (Paragraph
45)
18. While forecasting
will be a key task of the OBR, there is no point in devoting resources,
either to increase detail or frequency, to forecasts which will
have no practical application or benefits. In normal circumstances,
the OBR should produce two sets of forecasts a year. An extra
forecast would be desirable if there were significant monetary
or fiscal policy changes or significant external shocks. (Paragraph
46)
Sustainability analysis
19. We
support the interim OBR's recommendation that the permanent OBR
should produce an annual report on the long-term sustainability
of the public finances. This report should contain no policy recommendations.
(Paragraph 50)
Commentary
20. The
OBR's contribution to public understanding should not be confused
with self promotion. This commentary function should be one of
informing public debate through disseminating better understanding
of fiscal policy and long-term economic trends, identifying possible
risks in the structure of the economy and provision of data. Beyond
any duties set out on the face of the legislation, the statute
should give the OBR absolute discretion over the work it undertakes.
The legislation should leave the OBR able to conduct work on the
fiscal policies of political parties along the lines proposed
by Robert Chote in evidence on 16 September 2010. There may be
also particular subjects which the Treasury, or this Committee,
consider should be examined by the OBR. We would expect the OBR
to consider such proposals carefully and, where appropriate, explain
its decisions. (Paragraph 58)
21. As an additional
defence of OBR impartiality, we recommend that the OBR's core
tasks should be set out on the face of the legislation. (Paragraph
59)
22. We agree with
Mr Chote that it would be inappropriate for the OBR to have a
role in setting the fiscal mandate. This should be a political
decision. Once the mandate is set, any OBR commentary should be
based on aggregate fiscal figures, not on individual measures.
(Paragraph 64)
Staffing and resources
23. Sir
Alan Budd argued that it would not be cost-effective or practical
to duplicate or move into the OBR all the officials who spend
some of their time on the Budget forecasts. We accept that there
is a trade-off between delivering the most robust independence
and perception of independence and making the most efficient and
effective use of resources. (Paragraph 72)
Core staff
24. The
core staff of the OBR should be sufficiently large to support
an investigative team which would be able to go into a department
and scrutinise the data a department used or the way a particular
part of the forecast had been drawn up. The OBR should also have
sufficient resources to hire outside contractors to look into
particular aspects of the forecast data. (Paragraph 76)
25. Section 156 of
the Finance Act 1998 gives the Comptroller and Auditor General
a right of access to all relevant Government documents he may
reasonably require to carry out his audits of budget assumptions,
and the right to have explanation of those documents. We recommend
that, with the exception of material related to individual taxation,
the OBR should have similar rights of access to all relevant documents
(Paragraph 77)
26. The model chosen
by the Chancellor means that the OBR will not be the full time
employer of many of the people supplying information and analysis
which it will, after challenge, use in making its forecasts. Nevertheless,
the permanent OBR will need to be larger than the interim organisation,
and to command more resources. It will also need to be able to
draw on expertise within the Treasury, the DWP and HMRC. We do
not attempt to suggest precise numbers for core staff, as the
OBR might choose to hire people for specific tasks, or contract
out some research, but note that in addition to the 10 Treasury
staff whose functions should move to the OBR, we have also identified
a need for a research director, macroeconomic expertise, and some
sort of investigative team to ensure data are properly used.
The BRC must be confident that the OBR has the core staff it needs.
The safeguards over funding we propose in paragraph 112, and
the independent directors we propose in paragraph 96, should ensure
that any concerns are raised with us as part of its budget procedure,
as outlined by Mr Chote on 16 September. (Paragraph 84)
Duplication
27. We
accept that the Treasury may wish to replace some of those staff
who we propose should be moved to the OBR. Given the limited number
of posts involved, we consider that the advantages of independence
are well worth the costs of any duplication. The staffing of the
OBR should be one of the subjects examined in the five year review
we recommend (Paragraph 85)
Independence status
28. 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. (Paragraph 91)
Independence structure
29. 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. (Paragraph 94)
30. 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. (Paragraph 96)
31. 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. (Paragraph
97)
Appointment and dismissal
32. 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. (Paragraph 104)
33. 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.
(Paragraph 107)
34. 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. (Paragraph 108)
Finances and back office support
35. The
OBR needs to have full control over its communications, and this
function should not be shared with the Treasury press office.
(Paragraph 109)
36. 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.
(Paragraph 112)
37. 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. (Paragraph 115)
Relationship with the civil service
38. 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. (Paragraph 116)
39. The relationship
between the OBR and government departments should be set out clearly
in formal memoranda of understanding between 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 (Paragraph 117)
40. 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 (Paragraph 118)
The role of the NAO
41. 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.
(Paragraph 119)
Legislative framework
42. The
Treasury's task is now to prepare the legislation setting up the
permanent OBR. As a minimum we recommend that legislation should
include:
| a) | establishment of the OBR as an institution with its own legal personality, responsible for appointing its own staff;
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| b) | a requirement on the OBR to act transparently, objectively, and independently;
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| c) | a clear remit and set of core tasks;
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| d) | a requirement that the responsible select committee should have a veto over appointment or dismissal of the Chairman of the permanent body;
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| e) | provision for a small independent group to support the BRC;
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| f) | a requirement that Government officials support the OBR when it is preparing forecasts and that they have a duty to give the OBR full and objective advice;
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| g) | a requirement that the OBR has a right of access to the information it needs;
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| h) | a requirement for a review of the organisation five years after it is established.
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We have not set out in detail how these might be accomplished.
(Paragraph 120)
43. In preparing this
Report we have become aware of some anomalies in the current legislative
framework relating to fiscal forecasting. The framework for government
economic decision-making is still governed by the Code for Fiscal
Responsibility, any revision of which requires approval by the
House of Commons. The Code should have been revised as a consequence
of the Fiscal Responsibility Act 2010, but although the necessary
Order was laid, no steps were taken to approve it. The Code for
Fiscal Responsibility requires a Pre-Budget Report, a Budget Report
(containing an economic and fiscal projection) and other fiscal
reports to be published by the Treasury. The Treasury should bring
forward a revised Code for approval to ensure the OBR has control
of the publication of its forecasts. It should also, if necessary,
reflect changes in primary legislation and any changes to the
way Government proposes to make its fiscal reports to Parliament.
(Paragraph 121)
Non statutory measures
44. If
the OBR is to be credible, members of the Budget Responsibility
Committee will need not only to be independent but to demonstrate
that independence from the Government's own Treasury team. (Paragraph
123)
45. Although the forecasts
will be produced by a nonpartisan body, the future path of the
economy is the subject of intense political debate. The OBR's
forecasts will inevitably be used in that debate. To preserve
its reputation for political impartiality, it is essential that
the OBR takes all reasonable steps in the presentation of its
words to inhibit them from being misused or misrepresented. (Paragraph
124)
The Committee's role
46. The
current proposals for the OBR envisage that this Committee will
have a role in controlling both the appointment and the dismissal
of the Chair of the OBR. Our role in ensuring the independence
of the organisation goes beyond that. Whether or not the OBR is
established as a Parliamentary body, it is vital that it commands
confidence across party boundaries. We will take evidence from
the organisation regularly as part of the budget process. We will
intervene if we believe the OBR's independence is threatened.
We expect the members of the Budget Responsibility Committee or
the non-executive directors to report any concerns they have to
us. Only if it is independent will the OBR be successful. (Paragraph
125)
Success criteria
47. The
most important sign of the OBR's success will be that it establishes
and retains a reputation for independence and impartiality. While
its forecasts and publications should improve political debate,
the organisation itself will be under pressure to be drawn into
partisan disputes. (Paragraph 126)
48. An important criterion
is that the OBR should seek to avoid significant bias over time
in its forecasts, its assessment of trend growth, or its judgements
about the probability of the government's mandate being met on
the policies announced. (Paragraph 129)
49. The work of the
OBR needs to achieve and retain a high professional standing through
objectivity and transparency and by testing the models it uses
and its analysis, including work on the long term balance sheet,
with outside economists. The OBR should not seek extra resources,
either to extend its economic analysis or to get new data, beyond
the point at which the benefits can be clearly seen to justify
the costs. (Paragraph 130)
50. The OBR's reports
should be comprehensible to non-experts, like the output of the
interim OBR, and suitable for use in public debate. Its work should
improve the quality of that debate. But the OBR should not itself
run education campaigns (Paragraph 131)
51. There are significant
risks facing any new organisation. The approach put forward by
the interim BRC avoids the risk that the forecaster will lack
information available to Government, or that there will be wholesale
duplication of resources. It does, however, increase the risk
that the OBR will not be seen as independent, and this could undermine
the potential gain from this reform: increased trust in the forecasts
used in government policy making. We will scrutinise this carefully.
(Paragraph 132)
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