Appendix 1: Government Response
General issues
1. There may well be good reasons why the Finance
Bill also contains provisions extending the period for which all
Budget Resolutions have statutory effect to seven months, but
we recommend that our colleagues on the Finance Bill seek a full
explanation for this change. (Paragraph 3)
The Government is making changes to the Provisional
Collection of Taxes Act (PCTA) to maintain its practical effect
following changes to the parliamentary timetable.
The Tax Information and Impact Note published alongside
the Budget explained that the Government's objective in making
these changes was to maintain the practical effect of the PCTA,
ensuring the appropriate safeguards are in place and allowing
sufficient time for parliamentary scrutiny of the Bill.
In line with these objectives, the Government has
given careful consideration to the length of time for which the
PCTA resolutions should have effect.
Prorogation of Parliament, the Queen's Speech and
the debate on the Loyal Address will fall within the Finance Bill
timetable following the move to spring to spring sessions. Without
these proposed changes, the time available for parliamentary scrutiny
of tax legislation would be reduced.
2. It has been noticeable over many years under
successive Governments that measures appear to have been trailed,
sometimes accurately, sometimes in a way designed to place them
in the most favourable light. Whether particular press reports
are leaks or briefings or merely press speculation, we have no
view, but we deprecate both leaks, and any advance briefing. Such
activities are corrosive of good government. We will return to
this issue at future autumn statements and budgets. (Paragraph
4)
Inflation
3. The combination of high inflation, some derived
from external factors, and weak income growth is affecting the
living standards of many in the UK. At the moment, the costs to
the Government are rising with inflation-linked benefits but revenues—such
as from income tax—are not keeping pace, as wage growth
remains subdued. (Paragraph 13)
The OBR published an assessment of inflation at Budget.
They noted that the recent level of CPI inflation "reflect
a number of factors, including higher energy and world commodity
prices." These global pricing pressures, combined with the
temporary impact of the rise in VAT, are set to keep inflation
above target this year-the OBR warned that CPI inflation is expected
to "remain between 4 and 5 percent over most of 2011..."
But the OBR has also argued that inflation is to fall back sharply
in 2012 and return to target in 2013as "upward pressure from
higher inflation energy and commodity prices will gradually fade
while disinflationary impact of spare capacity continues to bear
down on inflation."
This is also the view of Bank of England who argued
in their latest May Inflation Report "inflation is likely
to fall through 2012 and 2013 as the impact of external pressures
and the increase of VAT dissipates and some downward pressure
from a margin of spare capacity persists."
The Government recognises household budgets are under
pressure and is taking action to help the most vulnerable:
- Budget 2011 announces a £630 cash increase
in the personal allowance for under 65s, taking it from £7,475
in 2011-12 to £8,105 in 2012-13.
- The basic rate limit will fall by £630 in
cash terms, taking it from £35,000 in 2011-12 to £34,370
in 2012-13. This leaves the higher rate tax threshold unchanged
and means Budget 2011 will not create any additional higher-rate
taxpayers.
- Recognising the impact of record pump prices,
the Government has announced a £1.9 billion package to ease
the burden on motorists. This includes a cut in fuel duty of 1
penny per litre at 6pm from Budget day.
- To support pensioners, the basic State Pension
will rise by 4.6%—equivalent to RPI—in April 2011
(rising from £97.65 to £102.15 a week). In 2012-13,
the triple lock—uprating the basic state pension by the
highest of earnings, CPI, or 2.5%-is forecast to increase basic
state pension spending by £1.1bn compared to the previous
indexation rules.
- An above-indexation rise (3.3%) in Pension Credit's
standard minimum income guarantee in 2011-12 ensures most low
income households benefit from the basic state pension rise. No
single pensioner need live on less than £137.35 a week, and
no couple on less than £209.70.
The Government is also committed to tackling price
volatility. The UK's G20 agenda in this area is to identify and
agree steps to ensure that global commodities markets are open,
transparent and efficient, and that in the long run demand and
supply are responsive to price changes.
Furthermore, the impact of high inflation on the
public finances is likely to be temporary. The OBR's assessment
is that the Government is on course to meet its fiscal mandate,
with the cyclically-adjusted current budget restored to balance
in 2014-15.
Forecasting general government employment
4. We understand that the collection of workforce
planning data across Government is difficult, particularly when
radical changes are in progress. The Government is the best source
of workforce plans to enable bottom-up forecasting of general
government employment. Such information, if collated, would be
of use to the Treasury in monitoring implementation and achievement
of the consolidation, as much as it would be of assistance to
the OBR in employment forecasting. We recommend that the Treasury
does what it can to collect this information in a timely fashion,
so that more is available before the next OBR forecast round.
(Paragraph 27)
The Government has confidence in the OBR's forecast
as the best estimate of general government headcount reductions
over the Spending Review period, based on aggregate spending plans.
The Government agrees with the Committee's comments
regarding the difficulty of bottom-up estimation of workforce
impacts given that workforce change will be an evolving process
over the next four years and beyond. It is for public sector
employers to determine the workforce implications of their settlements,
and the actual impact on employment will depend on allocations
of funding by departments and the ongoing workforces decisions
of hundreds, if not thousands, of employers up and down the country.
The public communication of plans is an issue for employers,
and must be handled sensitively, giving due regard to fair and
appropriate engagement with staff.
Output gap
5. We recognise the importance of estimates of
the output gap for assessments of the size of the structural deficit
but we note the risks inherent in overreliance on this uncertain
and imprecise measure as a basis for fiscal policy. (Paragraph
32)
The OBR is responsible for independently determining
all key judgements relating to the Government's achievement of
the fiscal mandate. In particular, it assesses and forecasts the
cyclical position of the economy, which determines estimates of
the structural position of the public finances. The amount of
spare capacity in the economy is an unobservable variable, so
the significant uncertainty as to its current and future size
is inevitable. But as the OBR state in their November Economic
and fiscal outlook, it is nevertheless necessary to form a judgement
on the size of the gap:[1]
"[...]we cannot assess the prospects for economic
growth over a five-year period without taking some view-implicit
or explicit-of the level of economic activity that the economy
can sustain, how that level is likely to change, and how far above
or below it the economy is currently operating. So some view of
the likely evolution of potential output and the output gap is
necessary to judge progress towards any medium-term target for
the public finances, not just a cyclically-adjusted one."
The OBR highlights the current size of the output
gap and the projection of its future path as one of the key parameters
affecting the evolution of the public finances over the medium
term. The OBR's March Economic and fiscal outlook compares OBR
estimates of the output gap with those of external forecasters,
and includes sensitivity analysis showing how a different output
gap would impact on the Government's chances of meeting the mandate.
Since the Budget, the OBR has published a Briefing Paper on Estimating
the output gap. This is a transparent and detailed explanation
of the two 'cyclical indicators' methods used by the OBR to estimate
the output gap: aggregate composite estimates and principal components
estimates. Later in the year, the OBR will publish a paper exploring
methods of estimating a historical output gap series, which will
allow the reassessment of the cyclical adjustment coefficients.
The fiscal mandate is based on a cyclically-adjusted
aggregate in order to allow some fiscal flexibility at a time
of economic uncertainty. It is supplemented with a target for
debt, which requires public sector net debt as a percentage of
GDP to be falling at a fixed date of 2015-16, ensuring that the
public finances are restored to a sustainable path in the medium
term
Changes within the Budget
6. In 2010 major decisions regarding public spending
and tax were made in the Chancellor's Budget and Spending Review.
It is therefore to be expected that the net fiscal effect of the
policy changes announced in the 2011 Budget was minimal: to have
done anything else would have contradicted one of the Chancellor
of the Exchequer's stated objectives in the Budget. (Paragraph
37)
Fiscal consolidation is necessary to reduce risks
in the short-term, restore private-sector confidence and underpin
sustainable economic growth. The ongoing global economic uncertainty
in the wake of the financial crisis, including from ongoing sovereign
debt concerns, reinforces the case for stability in the Government's
plans for fiscal consolidation.
Budget 2011 announced discretionary policy decisions
with a neutral impact on the public finances. The costs of policy
decisions announced in the Budget are broadly offset in each year
by measures to raise revenue. This balanced judgement reinforces
the fiscal consolidation plans announced in June Budget 2010 and
Spending Review 2010.
7. In this Red Book, as in the last, the Treasury
has included a considerable amount of additional analysis of the
distributional impact of the Budget measures, in response to our
requests. We are grateful for the Chancellor's responsiveness.
This has become a regular feature of the Budget documents. (Paragraph
41)
8. We note that the majority of the consolidation
has yet to begin. In the coming year, for example, the total consolidation
will increase over fourfold to £41bn in 2011-12 from £9.4bn
in 2010-11. The consolidation of spending is £5.5bn in 2010-11
and £22bn by 2011-12. One concern expressed to us was that
these future spending cuts may prove too difficult to implement.
We agree with the Chancellor that it will be important to strive
'to spread the burden fairly' as the consolidation begins in earnest.
Being seen to do so is important. (Paragraph 42)
The Government welcomes the response of the Committee
to its published distributional analysis. The Government will
continue to seek to enhance the analysis it publishes at Budgets
and welcomes all feedback that helps achieve this. The Government
is committed to increasing transparency and enabling the effective
scrutiny of policy making at future fiscal events.
Fairness is integral to the Government's fiscal strategy
and to sustainable growth. Tackling the deficit will ensure that
future generations are not burdened with unsustainable levels
of debt. The Government has a vision of a fair, simple and efficient
tax, benefit and pensions system which rewards work, saving and
personal responsibility.
The analysis published at Budget shows the top fifth
of earners is expected to make the greatest contribution towards
reducing the deficit as a percentage of their income and benefits
in kind from public services.
Meeting the fiscal mandate
9. The scenario and sensitivity analysis done
by the OBR in trying to understand the risks surrounding the meeting
of the fiscal mandate is welcome addition that will assist in
explaining the thinking behind whether or not the fiscal mandate
will be met. We welcome the fullness of the OBR Economic and Fiscal
Report. It will be the task of the newly created and independent
OBR rigorously to examine and explain progress in meeting the
fiscal mandate and hence reinforce the fiscal plan's credibility.
(Paragraph 48)
The Government welcomes the scenario and sensitivity
analysis undertaken by the OBR. Recognising the risks and uncertainty
about the future, the Government has taken a cautious approach
to the structural adjustment of the public finances; based on
its central, median forecast which takes into account all of the
Government's policies, the OBR are forecasting that the Government
will meet its fiscal mandate a year earlier than required, in
2014-15. The OBR state that, given past forecast errors, there
is roughly a 70 per cent chance that there will be a structural
current surplus in 2015-16.
Alternative strategies
10. Markets need to be confident that the Government
is committed to its fiscal policy. A Government which talked of
a Plan B as a substitute for that policy would prejudice that
confidence. However, as we explored in our evidence, a responsible
Chancellor is likely to have contingency plans to deal with a
variety of scenarios where economic circumstances are fundamentally
changing. Those plans should not be made public unless and until
they are needed. (Paragraph 53)
The Government set out a plan to reduce the deficit
over a credible timeframe at the June 2010 Budget and set out
further details in the Spending Review which took place in October
2010. The plan has been welcomed internationally with support
being received from the IMF, OECD and European Commission.
In the March Economic and Fiscal Outlook, the OBR
judged that the Government's plan is consistent with economic
growth across the forecast period to 2015 and that the Government
has a greater than 50% chance of meeting both its fiscal mandate
and supplementary target a year earlier than required, in 2014-15.
The Plan for Growth
11. We examine some of the proposals in The Plan
for Growth later in this report; we urge colleagues on other Committees
to evaluate the benefits of those within their terms of reference.
(Paragraph 74)
The Government welcomes the Committee's interest
in the measures set out in the Plan for Growth, and the implementation
of these will be a priority across Government. The Government
has also announced the second phase of the Growth Review, to examine
new issues and new sectors, and to be published at the time of
the Autumn Statement.
Tax reform and corporation tax
12. We welcome the reduction in the headline rate
of corporation tax and note the evidence provided that this has
boosted business growth and tax revenues elsewhere. We will monitor
closely the impact of this policy on corporation tax revenues
in the UK. (Paragraph 81)
The Government welcomes the Committee's support for
the reduction in the headline rate of corporation tax. This policy
will be monitored and assessed alongside other measures in the
Government's package of Corporation Tax changes.
Enterprise Zones
13. Enterprise Zones may have some effect in reviving
particular areas, but we note that almost all the evidence received
is unsure about the extent to which they will contribute to UK
growth. It is clear that there is still much to be done on the
details of this policy. We expect that our colleagues on the Business,
Innovation and Skills Committee and the Communities and Local
Government Committee will want to scrutinise this policy carefully
as it develops further. To aid them in this, we recommend that
the Treasury provide an analysis of the overall economic impact,
including measurement of any frictional and deadweight costs.
(Paragraph 93)
The Government will work with Local Enterprise Partnerships
to put an appropriate evaluation framework in place.
The Government recognises that the evidence base
for previous Enterprise Zone policy represents mixed success and
some important lessons to be learnt. Building on these lessons,
new Enterprise Zone policy will be focused much more on tapping
into the potential of places than trying to turn around the most
extreme examples of market failure.
There is also a much stronger focus on the longer
term viability of these zones, through improved infrastructure
including transport and broadband. The Government has deliberately
designed Enterprise Zone policy to give local authorities and
Local Enterprise Partnerships strong incentives to minimise local
displacement by linking the policy closely to wider policy objectives
on the local retention of business rates being taken forward through
the Local Resource Review. Local areas will directly benefit through
increased net rate retention where local displacement is minimised.
Housing and planning
14. The Plan for Growth contains measures to stimulate
demand from first-time buyers through the FirstBuy scheme, whilst
also undertaking reform of the planning system, which may, in
time, increase the supply of housing. If successful, the combination
of these measures should both increase the supply of houses, and
assist first-time buyers. However, if the Chancellor's expected
supply side response fails to materialise, additional demand from
FirstBuy could merely stimulate house prices. This could take
house purchase out of the reach of more people. We recommend that
the Treasury assess the impact of both the FirstBuy scheme and
the wider planning reforms, and report back at each Budget. (Paragraph
98)
The FirstBuy scheme will assist over 10,000 households
to buy a new home of their own. Because the scheme is intrinsically
linked to the supply of new-build homes it supports new supply
and will not put upwards pressure on house prices.
More broadly, the Government will assess the impact
of its overall planning reforms through a Regulatory Impact Assessment.
This will be published alongside the draft consultation on the
National Planning Policy Framework this summer. Other RIAs will
continue to be published on specific policy proposals, such as
the proposal to allow commercial properties to be re-classified
residential through the Use Class Order regime.
The moratorium on new UK regulation
15. The plan to boost micro businesses and start-ups
by a moratorium on new domestic regulation is intended to reduce
the burdens on business. The Committee has taken limited evidence
on this. We have however received evidence that the proposal may
create problems. Several lists of regulatory exceptions and some
administrative complexity could however be created by this apparently
attractive proposal. Furthermore, if the Government succeeds in
reducing new regulation overall, there may be less scope for the
exemption of micro businesses and start-ups from such measures.
Nor is it clear—where such an exemption is merited on welfare
grounds—that it should be time-limited, rather than related
to the size of the company. (Paragraph 106)
The Government's aim is that micro-businesses and
new start-ups should be subject to no new regulation for three
years from April 2011. A rigorous process requiring agreement
from the Economic Affairs Committee and Reducing Regulation Committee
has been set up to manage exemptions from the moratorium where
they are necessary. When seeking a waiver, departments must demonstrate
that they have taken concrete steps to mitigate the potential
impact of new regulations on micro-businesses and start-ups such
as exempting micros from written procedures or reducing the number
of forms to be completed.
Identifying which regulations apply to a micro business
should be less complicated than being subject to the burdens of
all new regulation. The Government will be clear who regulation
applies to, in legislation and its guidance, and in its business
support such as the guides on what regulation applies to each
type of business on the Business Link website.
The Government will publish guidance on the application
of the moratorium in due course. The policy will be reviewed before
the end of the Parliament to assess its impact and effectiveness.
Taxation
16. The Budget may not lead to a net simplification
in tax law—although this is difficult to quantify. We recognise
that it is very difficult to simplify an already complex system
and welcome the work of the Office of Tax Simplification and the
establishment of a 'direction of travel' towards simplification.
The rate of increase of complexity has certainly been slowed but
much more work is needed on the tax system before it can be said
to be moving towards simplification. We welcome the OTS's work
in this area; however the primary duty for securing simplification
should lie with the Government in its design and administration
of the tax system. (Paragraph 131)
The Government is committed to simplifying the tax
system. The Office of Tax Simplification (OTS) was established
to provide independent advice on ways to simplify existing tax
policy. Budget 2011 announced the first steps towards this aim.
Following recommendations made by the OTS, the Government decided
to abolish 43 reliefs; announced a consultation on integrating
the operation of income tax and NICs and asked the OTS to produce
a report that looked into simplifying tax administration for smaller
business. As part of their review of small business tax, the
OTS was also asked to look specifically at the issue of IR35.
Following the OTS's recommendations the Government announced that
it will reform and simplify the way IR35 is administered by HMRC.
The focus of further OTS reviews will be announced in due course.
The Government also acknowledges the important role
the tax policy making process has in supporting the move towards
a simpler tax system. Following extensive consultation, the Government
has made a number of changes to the way tax policy is developed,
communicated and legislated. In December 2010 the Government took
the unprecedented step of publishing the majority of Finance Bill
2011 clauses and guidance, in draft, for comment. Other changes
include the publication of the finalised version of a Tax Consultation
Framework on 31 March.
Respondents to the consultation for this Framework
have generally welcomed it as a positive step towards creating
a tax system which is predictable, stable and simple. Many of
the suggestions made during the consultation process have been
incorporated into the finalised Framework, while others will be
addressed through the guidance and training provided to policy
officials.
National Insurance and Income Tax
17. The Chancellor is not proposing to merge National
Insurance and income tax. The consultation is on the alignment
of the operational aspects of these two revenue streams. Whilst
this is likely to generate some benefits, it falls well short
of the more fundamental merger that had been anticipated in the
press in advance of the Budget speech. This is a complex issue
and we understand the Chancellor's desire to move cautiously.
The change appears to have been anticipated as a radical measure
but turned out, at second glance, to be a modest one. (Paragraph
136)
The Government believes that integrating the operation
of income tax and NICs can remove distortions, reduce burdens
on business and improve fairness. It will bring forward reforms
to meet these objectives by reducing the differences between the
current income tax and NICs systems.
The Government has announced that it will consult
on reforms to integrate the operation of income tax and National
Insurance contributions (NICs). This reflects the Government's
view that income tax and NICs should remain separate in recognition
of the entitlement NICs provides to contributory benefits and
the Government's decision not to extend NICs to other forms of
income, such as pensions, savings and dividends.
Disguised Remuneration
18. We draw the attention of colleagues dealing
with the Finance Bill in Committee to the proposals on disguised
remuneration. We urge them to ensure that the final legislation
is properly targeted, proportionate, and achieves its desired
impact without imposing undue burdens on businesses. (Paragraph
146)
The Government consulted widely on the draft Finance
Bill legislation. The Government listened to responses and made
carefully targeted changes to limit the impact on employers and
individuals where it was possible to identify arrangements that
could not be used for avoidance purposes.
Stability in the 2011 Budget
19. We recognise that it will not be possible
or desirable to consult on every tax increase ahead of the decision
being made. Moreover, if the Government wishes to adjust duty
rates in order to dampen the effects of oil price rises on end
users, compensating revenue will need to be found elsewhere. The
decision to increase the supplementary oil and gas levy by 12%
without warning, less than a year after the Government had undertaken
to provide a "stable" tax regime in the sector, may
weaken the Government's credibility in seeking to establish a
stable tax regime in this and other areas. Such reversals of policy
in the absence of changes of circumstances that would warrant
them is bad for business confidence and the credibility of government
policy making. We note that the Government "is now talking
to the industry quite intensively" and urge it to make sure
that industry is properly consulted on the design of the "stabiliser".
Colleagues on other committees may well wish to keep the effect
of this tax change on investment under review. (Paragraph 157)
The Government welcomes the Committee's recognition
that it is not possible or desirable to consult on every tax increase
ahead of the decision being made. The Fair Fuel Stabiliser, announced
at the Budget, was a direct response to the significant increase
in oil prices in recent months, which was both putting pressure
on motorists, and leading to unexpected profits for producers
in the North Sea. The Government will always need to retain some
flexibility on tax policy to respond to priorities and immediate
issues. However, the Government remains committed to stability
and predictability in the UK tax system. It has made a number
of substantive changes to the way tax policy is developed, communicated
and legislated, with consultation on policy and scrutiny of draft
legislation as cornerstones to the approach.
The Government welcomes the Committee's recognition
that the Fair Fuel Stabiliser allowed immediate support to be
provided to motorists in a fiscally responsible way. The design
of the stabiliser ensures that, should oil prices fall below a
certain level, the level of Supplementary Charge will fall in
a staged and affordable way. The Government is seeking the views
of the oil and gas industry and motoring groups before setting
the trigger price level, and has also committed to work with industry
to identify ways to provide long-term certainty and stability
on decommissioning relief.
Tax: practicality
20. We welcome the announcement in the Budget
that HMRC's existing administrative burden reduction target will
be expanded to include wider taxpayer compliance costs. It is
crucially important that the wider costs placed on the economy
by the tax system are taken into account and we will monitor the
commitment that any increase in administrative burdens in the
tax system will be met by equal reductions elsewhere in the tax
system. (Paragraph 159)
HMRC is committed to further minimising the costs
of customers meeting their tax obligations through simplification
and streamlining delivered through the HMRC customer centric strategy
and business plan. They are also working closely with the Office
for Tax Simplification (OTS) to identify simplifications to the
tax system, particularly in relation to small business taxation.
For the future HMRC are:
Modernising PAYE through Real Time information
which will collect information about tax and other deductions
automatically each time employers run their payroll with the potential
to significantly reduce burdens on employers;
From Autumn 2011, businesslink.gov will host a
new start-up hub for businesses. This will provide a single point
of access to services and support for new businesses, via personalised
web pages. In support of the 'One Click' initiative, new tools
will include a registration wizard, which is a single intelligent
form enabling business start-ups and new employers (or their agent)
to:
- Register for multiple taxes, and the associated
online services
- Set up agent details and direct debit payment
plans, and
- Subscribe to receive targeted email updates and
prompts from HMRC.
21. Whilst we welcome moves to allow businesses
and individuals to handle their tax affairs online, making this
mandatory without appropriate allowances being made runs the risk
of leaving behind the significant minority who do not have reliable
access to a computer or the internet. We agree with the Minister
for the Cabinet Office, who has stated that "Every single
Government service must be available to everyone—no matter
if they are online or not", and expect that principle to
be respected in the forthcoming consultation document. (Paragraph
162)
The Government recognise the concerns expressed here,
but this has to be balanced with the need for the UK to compete
in an increasingly digital world, where there is a shift away
from a traditional 'multi-channel' approach. Following Lord Carter's
2006 Report, HMRC's business tax strategy has been to move to
an online operating model and mandate the use of online channels
for filing of business taxes.
The Government were and remain mindful that this
should not disadvantage anybody and HMRC carried out a full assessment
of the impact of those proposals including full public consultation
and an Equality Impact Assessment in line with best practice.
Respondents asked for help and support in going online and HMRC
put in place a range of measures to address the concerns expressed
and help those who may be disadvantaged or have trouble accessing
the internet. This has been very successful. By April 2011 75%
of all VAT traders filed online including 380,000 who did so voluntarily
and were not mandated.
'One Click' and particularly the new registration
wizard will take this process to the next level, delivering online
HMRC services 'digitally by default'. We will continue our efforts
to bring everyone along with us and HMRC will seek views on how
best to achieve inclusion while staying within the spirit of Digital
by Default.
Tax: coherence
22. The Budget contained a number of measures
that have an impact on energy prices, ranging from the cancellation
of the fuel duty escalator to the introduction of the Price Floor
for carbon. Whilst we do not comment here on the likely impact
of individual measures, we note that, as a package, they lack
overall coherence. (Paragraph 169)
Given the high oil and retail prices the Government
reduced fuel duty and as part of the oil fair fuel stabiliser
increased the Supplementary Charge. Combined with increases in
the taxation of fossil fuels used to generate electricity (coal
and gas), through the introduction of the carbon price floor,
a more equitable incidence of the UK's energy taxes has been developed.
The Office for Budget Responsibility: process
23. Transparency about the basis on which the
forecast is made is essential. The Treasury now has to deal with
an external and independent body in constructing the Budget. It
needs to make allowances for that. However, the timetable agreed
for this forecast and Budget required all decisions which would
impact on the economic forecast to be made at least a fortnight
before Budget day. We recommend that the timetable should be revisited
to provide more flexibility enabling economic shocks and late
political decisions to be accommodated. It is understandable that
a number of adjustments to the process and timetable will be needed,
given that this was the first full forecast cycle since the creation
of the OBR. (Paragraph 173)
As the OBR produce the forecast independently, the
Chair of the OBR will write to the TSC in due course setting out
more detail on the precise forecast process.
The Government welcomes the extra transparency brought
by the OBR to the forecast, and accepts that the OBR's new role
will affect the timetable for Budget decisions. In the run up
to Budget 2011 the Government ensured that the OBR was aware of
policy decisions as far in advance as possible, and will continue
to support the OBR's forecast timetable in future Budgets.
The reliability of the forecast
24. In our earlier Report we noted "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." While forecasts are useful tools,
it is important that policymakers, and the public if possible,
are aware of their limitations. It is important that the OBR plays
its part by setting out as fully as possible each year the considerable
limitations of the forecasting process and product. (Paragraph
175)
The Government agrees that it is important that the
public understands the uncertainty around forecasts. The OBR is
being transparent about the composition of its forecast and about
the range of uncertainty around that forecast. The OBR has explicitly
explained the assumptions and judgements made in each forecast
in its Economic and Fiscal Outlook documents. The OBR uses fan
charts, which illustrate the probability of different outcomes
around a central, median forecast, to stress the uncertainty of
prospects for the economy and the public finances. These are based
on past Treasury forecast errors. The OBR has also explored alternative
scenarios in its forecast documents, and explained how these scenarios
would affect growth and the public finances. Finally, the OBR
has a legislative duty set by the Budget Responsibility and National
Audit Act 2011 to once a year produce an assessment of the accuracy
of its previous forecasts, which will aid understanding of the
limitations and vulnerabilities of forecasts.
25. We urge the OBR to reconsider the way in which
asset sales are treated both in the Economic and Fiscal Outlook
and in the forthcoming sustainability report. All economic forecasts
deal with a number of specific and very uncertain outcomes to
which numbers or assumptions are attached in the forecast. Asset
sales are no different from many of these. We are concerned that
caution in the treatment of asset sales may lead to a bias in
the central forecast. A forecast is no longer central if decisions
are made which have the effect of entrenching 'upside risk', a
phrase used by Mr Ramsden. (Paragraph 180)
As the OBR produce the forecast independently, the
Chair of the OBR will write to the TSC in due course setting out
more detail on the precise forecast process.
Responsibility for the forecast
26. We understand the Chancellor's desire to preserve
the OBR's independence. However, the uncertainty in forecasting
means that the OBR's work will indicate a range of probabilities,
not a precise prediction for each economic variable. It is reasonable
for a Government to accept and adopt the OBR's forecast without
necessarily agreeing with every single judgement in that forecast.
(Paragraph 183)
The Government agrees that it would be reasonable
to accept and adopt the OBR's forecast without necessarily agreeing
with every single judgement in that forecast. Paragraph 3.7 of
the Charter for Budget Responsibility explains that, "The
Government retains the right to disagree with the OBR's forecasts
and, if this is the case, will explain why to Parliament."
Review of the OBR
27. The review of the OBR's reporting performance
provided in the Act is well short of our recommendation that there
should be a fundamental review of the OBR's remit and operating
model after five years. We welcome the provision for independent
review of the reports from the Office for Budget Responsibility,
and may well engage with the Non-Executive directors on the arrangements
for those reviews. However, we continue to believe there is a
need for a fundamental review of the Office for Budget Responsibility,
which would not be confined to assessing the output of the new
organisation, but which would consider whether the framework established
by the Budget Responsibility and National Audit Act was the most
appropriate one. A wide ranging review of the OBR is essential.
There is, of course, no need for such a review to be statutory.
(Paragraph 185)
28. We welcome the Chancellor's commitment, subject
to consultation, that there should be such an independent, external
review. It should be led by someone outside the OBR, appointed
for the purpose after consultation with, and with the agreement
of, this Committee. We would like the Chancellor to come back
to us after he has consulted Mr Chote to confirm the arrangements
for this fundamental review. (Paragraph 187)
The government agrees it is best practice
for all public bodies to be subject to regular review, as required
by the Cabinet Office. This ensures that all public bodies are
delivering high quality services, efficiently and effectively
and that they fit within the Government's overall delivery structure.
Given the crucial and independent role for the OBR within the
fiscal framework the Government has recognised the need for regular
review of the OBR's performance. The Budget Responsibility and
National Audit Act 2011 includes a duty for the Non-executive
Committee to keep the OBR's performance against its duty under
review. The Act also includes a requirement Non-executive Committee
to arrange an external review of the OBR's reports at least once
in every 5-year period.
The Government has announced, subject
to consultation with the independent Chair of the OBR, to an independent
and external review of the OBR after its first five years of existence.
1 Economic and fiscal outlook, Office for Budget
Responsibility, November 2010 (p. 29). Back
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