Written evidence submitted by the Institute
of Chartered Accountants in England and Wales
INTRODUCTION
1. The ICAEW welcomes the opportunity to
comment on the Treasury Committee's inquiry into the Office for
Budget Responsibility (OBR).
2. The ICAEW advocated the creation of an independent
fiscal authority in our manifesto for the UK 2010 General Election
manifesto, and convened high-level policy discussion on how such
a body could work at the "Securing the Future of UK Public
Finances" Policy Summit, held in March 2010. On Thursday
17 June, the ICAEW hosted the interim Office for Budget Responsibility
consultation seminar, which brought together stakeholders to discuss
the development of the interim OBR into a permanent fiscal institution.
WHO WE
ARE
3. We draw on our technical expertise and
the experiences of our members, Chartered Accountants, to assist
policymakers. ICAEW operates under a Royal Charter, working in
the public interest with governments, regulators and industry
to maintain the highest standards. We represent and support over
134,000 members in more than 160 countries, across every sector
in business, practice and in the public sector.
EXECUTIVE SUMMARY
4. The OBR's role in assessing the UK's
fiscal sustainability is crucial, and of equal importance to its
role as an independent forecaster.
5. It is currently nearly impossible to make
a comprehensive assessment of liabilities in the public finances,
though stakeholders including the Office of National Statistics
(ONS) and ICAEW have made attempts. This is a major obstacle to
achieving sustainable public finances. The OBR can play a critically
important role in addressing this problem.
6. The OBR should take an active role in
public debate on fiscal sustainability issues, commenting and
making recommendations on initiatives and policies intended to
improve the transparency of public finances.
7. That role should extend to the international
stage, working with international finance bodies to improve the
quality of public financial information worldwide, and taking
a leading role in the G20's efforts to establish an early warning
systems for financial risk issues related to national debt.
8. The OBR should employ a dedicated full-time
staff, independent of the Treasury, to support its forecasting
and fiscal sustainability work.
9. The OBR should co-ordinate a "fiscal
sustainability research committee" of interested UK authorities,
from the public and private sectors, to advise its work.
10. To avoid "group think", the
Budget Responsibility Committee should include at least one non-economist;
an individual with expertise in public finance, accountancy and
fiscal sustainability issues.
RESPONSES TO
SPECIFIC QUESTIONS/POINTS
Remit of the permanent OBR
11. The ICAEW is a strong supporter of a
permanent Office of Budget Responsibility. We believe that the
OBR has a great opportunity to improve the quality and transparency
of public financial information in the UK. At a basic level, ministers,
public sector managers, parliamentarians and the public currently
do not know enough about what our national liabilities are.
12. The permanent OBR will have an important
role in producing independent forecasts for both growth and borrowing,
and there are a number of complex resource, accountability and
independence issues to resolve around the OBR's forecasting role.
However, in this submission, the ICAEW is focusing on the role
that the OBR can play in the broader effort to increase the transparency
of public finances and improve fiscal sustainability.
13. The interim OBR began "an independent
assessment of the public sector balance sheet and fiscal sustainability,
including assessing the impact of ageing, public service pensions
and PFI/PPP contracts". The ICAEW believes that the OBR's
fiscal sustainability research role is of critical importance
and should be considered on a par with its economic forecasting
role in terms of the value that the organisation can bring to
public and political decision making.
14. UK public sector net debt (excluding
financial sector intervention) for 2010-11 stands at £932
billion.[6]
Beyond the official public sector net debt figure, research conducted
by ICAEW and the Centre for Economics and Business Research (CEBR)
indicates that the government is exposed to an additional £1.13
trillion of liabilities.[7]
The majority of the additional liability derives from public sector
and local government pension liabilities, PFI/PPP obligations
and contingent liabilities (those arising through implicit or
political guarantees rather than contractual obligations, like
specific financial sector interventions). Our research aimed to
quantify public sector "off balance sheet" liabilities
and improve awareness about why there are different approaches
and standards for assessing public debt.
15. While our research and a recent study
by the ONS attempted to quantify an overall figure for UK public
liabilities, the overriding issue for policy makers is the uncertainty
around the number. Investors, taxpayers, ratepayers, public officials,
the media and politicians require more complete information about
the broader liabilities facing the UK than is offered by the official
Public Sector Net Debt figure. Such information can only be pieced
together, incompletely, from component official sources and economic
estimates. As a result, policy makers and the public are not able
to make a comprehensive assessment about the public liabilities,
which frustrates both the incentive and the capacity to achieve
sustainable public finances in the long-term and, at a more basic
level, fairness from one generation to another.
16. We fully support the interim OBR's recommendation
for the permanent OBR to publish an annual long-term sustainability
report alongside its major Budget forecast report.[8]
The permanent OBR should build on the OBR's work on fiscal sustainability
in its report published prior to the 2010 emergency Budget, the
ICAEW's own research and recent ONS research on "Generational
Accounts" to examine the impact of future fiscal pressures
on public sector liabilities. Contingent liabilities in particular
are are a hugely complex topic. Much more research and public
debate is required to better understand and quantify the extent
of UK exposure to these contingent liabilities.
17. The ICAEW believes that the OBR's fiscal
sustainability role should include actively informing public and
media debate on fiscal sustainability issues; making policy recommendations
on initiatives that could improve the transparency of public finances;
and taking a leading role in international efforts to improve
the comparability of national fiscal performance and establish
an early warning systems for systemic financial risk issues.
18. First, the OBR should advise and inform
public, media and parliamentary debate around fiscal sustainability
issues. Against the context of the Government's ambition to be
more transparent about the way in which public money is spent,
including the publication of the COINS database and expenditure
more broadly, the OBR will need to take an active role in responding
to media coverage that uses public financial information "out
of context". The independence and credibility of the OBR's
commentary will be critical in order to achieve a sophisticated
public debate around financial information released to the public,
strengthening the political viability of transparency agenda over
the long-term.
19. Secondly, the OBR should advise the
public and parliament of the value of technical initiatives that
have the potential to improve the transparency of public finances.
This should include evaluating the development of the Treasury's
"Clear Line of Sight" and `Whole of Government Accounts'
projects, which are likely to bring pensions and PFI/PPP liabilities
"on-balance sheet" and consolidate statutory accounts
across the public sector in one place for the first time on an
auditable basis. The OBR should also offer opinions on the likely
value of other initiatives designed to improve the transparency
of public finances, such as publishing all new items of central
government spending over £25,000 online.
20. While the ICAEW agrees that the OBR
should not make recommendations on tax policy to the Chancellor,
the OBR's fiscal sustainability remit should include the power
to make recommendations on the technical projects and tools that
could enable greater transparency and better financial management
in the public sector. This will require an active and constructive
dialogue with the Treasury's Financial Reporting and Management
Directorate.
21. Thirdly, the OBR should have an international
remit. On the fiscal sustainability agenda, the OBR should work
with authorities such as the International Federation of Accountants
(IFAC), the International Public Sector Accounting Standards Board
(IPSASB), and the International Monetary Fund (IMF) to improve
the quality and comparability of public financial information
worldwide. The OBR's international work should also include working
with the IMF, the European Union and a global network of information
sharing bodies to fulfil the G20 ambition of establishing an international
early warning system for instability resulting from government
debt and liabilities.
22. A strong and broad remit on fiscal sustainability
is likely to yield substantial benefits. These include increasing
the OBR's credibility by placing it at the centre of a public
debate about public finances and fairness from one generation
to another; and strengthening the OBR's forecasting methodologies
through insights gained as a result of original fiscal sustainability
research.
Appropriate means of ensuring both independence
and accountability for the OBR
23. The ICAEW agrees with many of the interim
OBR's recommendations on the independence and accountability of
the permanent OBR. The OBR and its remit should have a legislative
basis, and the Treasury Committee should scrutinise its appointments
and work. The OBR should be located outside the Treasury building,
and the OBR should have far-reaching rights to access public data.
24. However, once operational independence and
an accountability regime has been established, the ICAEW would
support the need for OBR to have a close working relationship
with the relevant public and private sector authorities in connection
with its fiscal sustainability research. The ICAEW believes that
the OBR should actively seek to coordinate the research effort
of those organisations, and we recommend that the OBR convenes
a "fiscal sustainability" research committee of interested
UK authorities, potentially to include the Government Actuary's
Department, the Office of National Statistics, the Bank of England,
the National Audit Office, the National Institute of Economic
and Social Research, the Debt Management Office and relevant private
sector authorities. Secondment arrangements between the relevant
institutions and the potential for outsourcing and partnerships
should be encouraged.
25. While there are important considerations
for the Treasury Committee to analyse about the possible duplication
of forecasting staff between HM Treasury and the OBR—taking
into consideration the peak-flow nature of the work, confidentiality,
and independence issues—similar concerns do not exist for
fiscal sustainability or public sector accountancy research. On
the fiscal sustainability agenda, we recommend that the OBR employs
dedicated full-time staff and also commissions academic or consultancy
work as required. The OBR's fiscal sustainability work will require
a close working relationship with the Financial Reporting and
Management Directorate in HM Treasury and will continue to rely
on existing research produced by the government and elsewhere.
We agree that the relationship between the Treasury and the OBR
should be formalised in a Memorandum of Understanding.
Appropriate resources for the permanent OBR
26. The ICAEW believes that the OBR should
have the necessary resources to carry out the ambitious fiscal
sustainability research role outlined in this submission, including
staff and travel budget for international engagement and budget
for promotional and advisory activities, as well as the budget
and staff required in order to produce independent economic and
fiscal forecasting.
27. However, the ICAEW believes that the OBR
will be in a position to exercise a "power to convene"
model. The OBR will be in a position to coordinate and lead the
fiscal sustainability research agenda across relevant authorities
in the UK. While the OBR will need credible in-house resource,
it should look to use the resources and expertise available in
other public bodies or public interest professional bodies, such
as the ICAEW, through a "fiscal sustainability" research
committee.
28. A strong and robust governance and consultation
regime will help ensure the long-term viability of the OBR. When
public or political pressure is put on the OBR, it will be important
that it can point to consultation and dialogue with relevant authorities.
29. To avoid group-think, the ICAEW recommends
that the OBR leadership—the Budget Responsibility Committee—includes
at least one individual who is not an economist, but has expertise
in public finances, accountancy and fiscal sustainability issues.
August 2010
6 Office of National Statistics "Public Sector
Finances" Report (June 2010). Back
7
ICAEW/CEBR "Improving Transparency" study paper
into public liabilities (July 2010). Back
8
Interim Office of Budget Responsibility letter to the Chancellor
"Establishing the Office for Budget Responsibility",
para 27 (12 July 2010). Back
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