Written evidence Submitted by the Chancellor of the Exchequer

You asked me to set out some more of my thinking on the arrangements for the permanent Office for Budget Responsibility.

Before I do so, I would like, first, to put on record my gratitude to Alan Budd, and his colleagues Geoffrey Dicks and Graham Parker, in agreeing to lead this new venture. I believe that the OBR marks a step change in the transparency and openness of economic and fiscal policy making. International reaction has been very positive. The OECD described the advent of the OBR as "clearly an important initiative in terms of strengthening government management of public spending and improving public confidence in the government's fiscal policy". The IMF noted that the OBR's proposed mandate is "broadly consistent with established best practice for independent fiscal councils." Sir Alan and his colleagues have been central to this innovation.

I was under no illusion at the scale of the challenge in establishing an interim body to deliver two forecasts in time for a June Budget just forty-two days after the General Election. Sir Alan and his colleagues met this challenge head-on and have made an important, and I hope very long-lasting, contribution to the development of economic policy-making in this country.

Sir Alan's own recommendations on the arrangements for the permanent OBR mirror many of my own thoughts. The arrangements under which the OBR currently works reflect its status as an interim body, prior to the introduction of legislation. It is, and has always been, my intention that the OBR should evolve from its interim status.

The interim OBR was, of necessity, located within the Treasury building, and staffed by redeployed Treasury officials. Sir Alan said that at no point has there been any ministerial interference in any of the interim OBR's work, and I am comfortable that the OBR has been functionally independent in its interim status. But it is important not just to be independent, but to be clearly seen to be independent. The legislation that we will be bringing forward shortly will allow us to take steps to meet those perceptions. I expect that the OBR will be legislated for in the autumn.

I will listen to the evidence put before the Treasury Select Committee before making more detailed proposals in the legislation, but it may be helpful for your considerations to note my initial thinking.

The appointments to the Budget Responsibility Committee

I agree with Sir Alan that Parliament will play a prominent role in preserving the independence and accountability of the OBR. As I told the Committee on Thursday, I intend to provide in the legislation for the TSC to have the power of veto over the appointment of the Chair of the OBR. A statutory veto bestows upon the TSC more power over the appointment than they currently have over any public appointment. I propose to take this unprecedented step because I want there to be absolutely no doubt that the individual leading the OBR is independent and has the support and approval of the TSC.

An advertisement for the permanent Members of the BRC was placed in The Economist newspaper on Friday 16 July and is on the OBR's website, and it is expected that an appointment will be made in September. In order to ensure that the TSC has an effective power of veto over this appointment prior to the enactment of the Bill, I propose that the TSC conduct a pre-appointment hearing of the proposed candidate and I will not appoint a candidate who is judged unsuitable by the TSC.

My intention is for the two other positions on the Budget Responsibility Committee, currently occupied on an interim basis by Graham Parker and Geoffrey Dicks, to be subject to pre-commencement hearings before the TSC. This is a well established and well understood process for other public appointments, such as those for external members of the MPC.

Reappointment and removal of the Chair of the BRC

The Bill will set out fixed five-year terms for the BRC members, including the Chair of the OBR. These will be renewable once, and renewal will again be subject to the recommendation of the Chancellor and agreement of the TSC.

I also wish to ensure that the Chair cannot be removed at the whim of the Chancellor. The Bill will contain provisions to the effect that the Chair may be removed by the Chancellor only under exceptional circumstances and with the express agreement of the TSC. These arrangements are the appropriate converse to the appointments process outlined above, in which the Chancellor is accountable for the appointment of the Chair of the OBR, and the TSC has formal power of veto.

Location of the OBR

The interim OBR is located in the Treasury. This was necessary given the time constraints placed upon the production of its first forecast: the OBR began work a matter of days after the Government was elected. While this in no way affected the real independence of the OBR, I will ask my officials to take forward the relocation of the permanent body outside the Treasury. It is worth noting two points. First. changing the OBR's physical location will not be instant. For example, it will be necessary to provide the OBR with secure information technology systems for holding government data. Some of the OBR's ongoing work may therefore happen while it is still in the Treasury. Second, given the need for close working with the Treasury around fiscal events, there will be occasions when OBR officials may spend extended periods of time inside the Treasury. I hope that. with the other measures I introduce, this practical necessity will be accepted and understood.

The OBR's forecasts

Sir Alan made a series of recommendations about the substance and process of producing forecasts. Discharging this function in a transparent and independent way will remain central to the credibility of the Government's fiscal framework. I therefore make the following observations:

· I wish to reiterate the statement I made when I announced the establishment of the OBR: I want us to be one of the few advanced economies with an independent fiscal agency that produces official fiscal and economic forecasts. In the formulation of policy, I will retain the right to disagree with the OBR's forecast. However, if I do so, I will have to explain my actions to Parliament, through the TSC. This will further enhance parliamentary accountability. I further expect that the OBR will lay its reports directly before Parliament, and that the BRC Members will appear before the TSC on the publication of its forecasts, as the interim members have done this year.

· I agree with Sir Alan that a minimum two forecasts, spread evenly over the year, represent a sensible approach for the OBR in its steady state. It is in line with international best practice.

· I agree with Sir Alan that steps should be taken to enhance the technical independence of the OBR. I will ensure that those working at the heart of the forecasting process are clearly part of the OBR. Given the complexity and large amount of detail upon which the fiscal forecasts depend, much of which only exists within Government, there will continue to be close working with the Treasury and other Government departments.

· On the process of publication, I think it is important that the OBR follow a transparent, regular and predictable process for the publication of information, for either future forecasts or supplementary information on existing forecasts, with release dates set out well in advance.

July 2010

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