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Office for Budget Responsibility

Volume 719: debated on Monday 14 June 2010


My Lords, with the leave of the House, I shall now repeat a Statement made earlier in another place by my right honourable friend the Chancellor of the Exchequer.

“Mr Speaker, with permission, I would like to make a Statement on the Office for Budget Responsibility, which this Government created on coming into office. This morning, for the first time in British history, we have opened up the Treasury books and allowed the publication of an independent and comprehensive assessment of the public finances. From now on, Governments will have to fix the budget to fit the figures instead of fixing the figures to fit the budget. I would like to thank Sir Alan Budd, the members of the Budget Responsibility Committee, and all the staff for the impressive work they have done.

There has been some interest in whether the OBR will publish all the relevant underlying assumptions and judgments driving the forecast. Today’s report does more than that. There are over 70 pages of detailed material, much of which has never been seen before. For the first time ever, the Government are publishing the assumptions that lie behind the estimates for average earnings, property prices, interest rates, financial sector profits and, crucially, a five-year forecast for annually managed expenditure. This includes a forecast for the amount of debt interest that we as a country will pay over the coming years.

The creation of the OBR has already impressed the international community and has been praised by the International Monetary Fund and the G20. We will now move to put the OBR on a statutory footing with legislation included in the Queen’s Speech. So from now on, Members of Parliament sent to this House to scrutinise how the Government spend taxpayers’ money will for the first time have access to the honest figures.

Let me now turn to those figures and what the OBR has uncovered. First, the forecasts for growth in the economy. The OBR is forecasting growth to reach 1.3 per cent this year and 2.6 per cent next year. In future years, the OBR’s forecast is for growth of around 2.8 per cent in 2012 and 2013, and then 2.6 per cent in 2014. The forecasts for growth are, sadly for our country, lower in every single year than the figures that were announced by the previous Chancellor at the time of the last Government’s Budget in March. He told us that growth would soar to 3.25 per cent in 2011 and then to 3.5 per cent in 2012. At the time these forecasts were given, neither the Bank of England nor 28 of the main 30 private institutions producing forecasts for the UK were offering such an optimistic central view of the economy. We can only speculate as to why such rosy forecasts for a trampoline recovery were produced only weeks ahead of a general election.

Let me now turn to the OBR’s forecasts for the public finances. The latest out-turn data show public sector net borrowing for the last year was £156 billion. The OBR is forecasting that it will be £155 billion this year. It is the highest budget deficit of any country in the European Union with the exception of Ireland. It is £10 billion less than the forecast given only a month before the end of the last fiscal year, but I can tell the House that, based on the OBR’s figures, the £10 billion advantage we start with decreases to only £3 billion by the end of the Parliament. The reason for that is that the cyclically adjusted current balance—commonly known as the structural deficit—is forecast to be higher in every single year than what this House was told in March.

This is the most important figure in this report because the structural deficit is the borrowing that remains even when growth in the economy returns, and it is the structural deficit that is a key determinant of whether the public finances are sustainable. This year, the structural deficit is forecast to reach 5.2 per cent of GDP; that is £9 billion higher than we were told in March. Next year, the structural deficit will be £12 billion higher than we were told.

Turning to debt, the OBR’s forecast sees it rising as a share of GDP throughout the Parliament, and the interest on that debt, which we as taxpayers have to pay, also grows every year. Let me be the first Chancellor in modern history to give you those numbers for the coming years. The OBR forecast is that this is what Britain will have to pay for its debts: £42 billion this year, then £46 billion next year, then £54 billion, then £60 billion, reaching £67 billion in 2014-15—more than a quarter of a trillion pounds coming from the pockets of the taxpayer over the course of this Parliament simply to service the debts left by the previous Government.

The figures produced by the OBR also give us a new insight into the spending plans we inherited as a Government. They show that, given the OBR’s assumptions, the previous Government would have had to find £44 billion of spending cuts in departmental budgets in order to deliver their plans. I can confirm that I have found no evidence at the Treasury for how even a single pound of these £44 billion of spending cuts were ever to be achieved.

There are two other very important considerations that relate to these forecasts, and which understate the situation we inherited. First, these are central forecasts with a fan chart around them to represent the great uncertainty that exists, rather than a Treasury forecast based on an arbitrary reduction in the trend level of output. As a result, they understate the increase in the structural deficit and the reduction in growth. Secondly, these projections have been based on recent markets interest rates, which are about a third of a percentage point lower in Britain than at the time of the election, and, as is widely acknowledged, this in part reflects the investors’ confidence that the new coalition Government will take action to deal with the deficit. As a result, as Sir Alan points out in his report,

‘in present conditions the likely result is that these economic forecasts are biased upwards’.

This is absolutely crucial to understanding today’s figures, because if we had followed the fiscal path set out by the previous Government it would, in Sir Alan’s words,

‘lead to higher interest rates and so lower economic activity’,

than forecast in the OBR report.

Let me conclude with this. The independent report published today confirms that this coalition Government had inherited from its predecessor one of the largest deficits in the world; forecasts for growth lower than the country was told at the time of the election; a larger structural deficit than previously admitted; a debt interest bill larger than the schools budget. It is indeed worse than we thought. And the public would have known none of this if we had not set up the Office for Budget Responsibility. Next week I will return to the House to explain what we will do about it. In the mean time, I commend this Statement to the House”.

My Lords, that concludes the Statement.

My Lords, I thank the Minister for repeating the Statement made by his right honourable friend in another place. This is a remarkable Statement, not only because so little of it relates to the concrete forecasts in the document that it purports to describe but also because it fails to note comments that the OBR makes on the earlier analysis of the economy presented by my right honourable friend Alistair Darling.

During the past few weeks, since the formation of the coalition Government, we have been subject to a barrage of statements from the Prime Minister claiming that the underlying position of the economy is far worse than that laid out by Mr Darling in his March Budget. For example, the Prime Minister said on 7 June:

“The overall scale of the problem is even worse than we thought”.

Yet what does the OBR report argue? I quote the OBR’s press notice:

“The nominal figures for the deficit and net borrowing are better in all years than in the March Budget”.

On numerous occasions, the Chancellor of the Exchequer has cast doubt on his predecessor’s integrity in presenting economic forecasts—he could not even resist the odd snide remark today. Yet the OBR report states:

“The forecast is based on a range of possible outcomes around a central view … This differs from previous practice under which some assumptions were designed to add caution to the fiscal forecast”.

As the official press notice puts it, the methodology of the OBR replaces,

“in some cases, deliberately cautious assumptions”.

So not only have things turned out better than Mr Darling argued in March but the reason is probably that he was so persistently cautious. Mr Darling is owed a formal apology. I hope the noble Lord will make that apology which the OBR report demonstrates in all common decency to be necessary.

The general forecast in the OBR report is for a lower trend rate of growth than was presented in the March Budget. What is not made clear is how the assumptions made by the authors of the OBR report differ from those on which the earlier forecast was made. It is the variation in the assumptions that is the source of the different forecasts.

In the limited time available, I have managed to unearth the fact—and it took some unearthing—that the assumed rate of growth of the eurozone is significantly lower, which, given what has happened since March, is perfectly reasonable. Will the Minister tell us what other key assumptions have been changed, and why? How has the assumed rate of growth of consumer expenditure been changed, and why? How has the assumed rate of the growth of business investment been changed, and why?

There is but one key element in the OBR report which might be deemed critical of the previous Government, and on which Mr Osborne focused in the Statement. It is the so-called structural budget deficit—not the actual budget deficit—which the report shows to be worse than was reported in the March Budget. I hope that your Lordships will forgive me if I spend a few moments unpicking this disagreement.

The structural budget deficit is an estimated deficit when the economy is operating at an estimated normal level. The OBR finds that this is worse than was reported in the March Budget. Why? The problem is estimating what is the normal level of the economy and how far below it we are now. The OBR makes a crucial assumption: that instead of the economy operating 6 per cent below normal in 2009, it was operating only 4 per cent below normal. Everything hangs on that single, crucial assumption. For if we are nearer normal operation than we thought, then the deficit under normal circumstances would be bigger than we thought. But what about this assumption? The OBR admits that it is “very tentative”. It says:

“Estimates of the underlying supply potential of the economy and the amount of spare capacity are uncertain at the best of times. In the aftermath of the financial crisis, which is likely to have had an adverse effect on the supply potential of the economy, such estimates are subject to greater uncertainty than usual”.

This—a figure subject to great uncertainty—is described by Mr Osborne in the Statement as,

“the most important figure in the report”.

He is grasping at straws. The key case for his deficit hysteria is based on an estimate,

“subject to greater uncertainty than usual”.

Then we have the debt interest figures, of which Mr Osborne makes so much. But again he cannot resist fiddling the figures by giving the total of debt interest, not the increase in debt interest due to the recession, including amounts that would have had to be paid anyway.

The Statement also makes much of the independence of the OBR—an independence which we applaud. When the Minister replies, will he confirm that all the assumptions in the forecast for Mr Darling’s March Budget were audited independently by the National Audit Office, and that the assumptions in the OBR report have not been so independently audited? Would he also confirm that it is normal practice that ONS statistics are seen by Ministers just 24 hours before their release? Would he tell the House when Ministers had sight of the OBR report? What is remarkable about the OBR is that it demonstrates how damaging would be the substantial cuts that the Government declare that they plan to make in public expenditure. The report demonstrates that the measures taken by the previous Government have set the economy on a path of steady deficit reduction, halving the deficit in three years, and setting the economy on a path of fiscal stability. All that will be threatened by the deficit hysteria of the coalition. The OBR report demonstrates with unerring clarity that their masochistic desire for an age of austerity is not only bizarre but unnecessary.

I thank the noble Lord, Lord Eatwell, for his points, but it really is not a picture of the public finances that this Government have inherited that I recognise at all, or of the history nature of the formation of the OBR and the publication today of this astonishing new document which, for the first time, lays out transparently and independently the forecasts and numbers on which the Chancellor can form his budget. A position in which the public sector net debt is forecast to continue to rise from the 2009-10 level of £53.5 billion up to £74.4 billion at the end of the forecast period in 2014-15 speaks for itself. The reason that the deterioration in the numbers is so striking today is partly because the structural deficit turns out to be significantly worse and the sustainable growth rate to be not nearly as it appeared from the numbers that the previous Chancellor set out, which were thought to be completely incredible by forecasters at the time—and the OBR has confirmed this today. The document also sets out that, even in the numbers that the Chancellor presented in his March Budget, £44 billion-worth of cuts were assumed which were not explained anywhere in those numbers. They are set out for the first time today in a full forecast of total managed expenditure, for the full five-year forecast period. So the document exposes the total size of the inheritance that we were left—the fact that the plan for dealing with the deficit did not exist and that the structural problems of the economy are far worse. All we have in response from the noble Lord is to pick at the quite proper caution with which Sir Alan Budd and the OBR present their numbers. This is the first time that numbers like this have been presented. They have presented them quickly and at a time of an inheritance of huge problems in the economy, and all that the noble Lord can do is draw attention to the proper caution with which the OBR has rightly presented its numbers.

The noble Lord also questions the independence of the OBR’s numbers in relation to those presented in the past by the Treasury. It is indeed the case that Treasury numbers have been ticked up by the National Audit Office, but it is false to compare an independent forecast produced by the Office for Budget Responsibility with the NAO audit of the Treasury numbers.

In answer to a question from the noble Lord about when the Chancellor saw the forecast, I assure him that an initial view of the numbers was shown to the Chancellor on Friday 28 May with a further update on Thursday 3 June. The OBR then shared the report with the Chancellor on Wednesday 9 June.

It might help further to clarify that the document that sets out the forecast is not required to be audited by the NAO under the code for fiscal stability in the Finance Act 1998, which applies to the Budget itself, although I do not think that the noble Lord was suggesting that the OBR numbers should be subject to NAO scrutiny.

My Lords, I have not had the opportunity to go through as much of the detail as my noble friend Lord Eatwell, who I thought did very well and exposed so much of this so-called “independent” report. We were told just now in an answer by the Minister that the Chancellor saw some figures on 28 May, so the so-called “independent” OBR was consulting the Treasury all along. Is that true? Was it really being consulted all along, or is it truly independent—any more independent than all the other “independent” forecasts we get from all kinds of sources?

More important is the accusation by the Chancellor that the figures previously issued in the name of Treasury officials, not by the former Chancellor, were dishonest—that they were fiddled by Ministers and yet Treasury officials allowed them to go out in their name. Is that not rather insulting of officials?

More seriously, how many Treasury officials who were doing this job before are still there? Or are they now working for the OBR? Perhaps the Minister will tell us. He also referred to this five-year forecast. Most people, including myself, would be reluctant to forecast a few months ahead, let alone five years. Will he reassure us that that forecast will not be amended every few months by the independent OBR?

More importantly, will he confirm what the assumptions were for unemployment if the Chancellor’s deficit reduction programme, to be announced in the Budget, is anything like the rhetoric we hear at the moment?

I am grateful to the noble Lord, Lord Barnett. He enables me to confirm the nature of the independence of the OBR. To call into question the independence of Sir Alan Budd and his committee—as he went on to say, that is not the most important thing, so perhaps I should pass over it and move on.

I also rather resent, on behalf of the Treasury officials with whom I work every day, the thought either that they were in some way party to some conspiracy before or that they are not capable of doing work, then or now, of the highest quality. The difference now is that the OBR has set out critical fan charts to show central forecasts and probability distributions around those forecasts. Noble Lords may tut-tut, but this is a practice that has been adopted by the Bank of England in its forecasts for many years.

The forecasts are transparent; people have been able to see how it has formed its views on all its forecasts. As for Treasury Ministers in the past, they have plucked numbers out and it has been non-transparent. Here we have a degree of transparency by which you can hold the Treasury to account, going forward. The noble Lord also asked whether the five-year forecasts will be amended very regularly. Certainly, the OBR will be publishing in conjunction with the Budget again, and, as it said in its document and terms of reference, it will be publishing its forecasts regularly.

My Lords, we have just witnessed a great display of who said what to whom, and of “Oh yes he did” and “Oh no he didn’t”, that would frustrate every businessman and woman in this country, because—I hope that the Minister will comment on this—without doubt, whoever is right or wrong, this country is in the economic dippy-doo. The only way out of this is to trade our way out, to generate the wealth that will create the jobs in the private sector and generate the taxation to pay down the deficit.

When the Minister was repeating what the Chancellor of the Exchequer had said in another place, at the end I heard that next week we are going to hear what he intends to do about it. I urge the Minister to go back to his colleagues and, whatever they do next week and however or whenever they cut—when we hear so much about public spending, of how much or how little we are going to spend and, at the end of the day, of ring-fencing it or cutting it more quickly—to ask whether anybody has ever thought about earning the stuff, because without earning it you cannot cut it. I would welcome a comment on what we are going to do about generating the business growth that will render all of this at least relevant.

My Lords, the noble Lord, Lord Jones of Birmingham, raises a critical point: how are we going to get growth going again, as none of this public expenditure gets paid for unless we get the private sector economy growing strongly? While my right honourable friend the Chancellor will be setting out in his Budget next week the important strands of our growth strategy, I stress that what is so critical about the creation of the OBR and the early action that was taken on the initial £6 billion of cuts is the credibility that gives to the new Government’s plans to grip the appalling economic situation we have inherited. That has already started to give confidence to the markets, as has been seen in the low interest rates. The critical importance of keeping interest rates low has to be one of the first foundations on which we can rebuild sustainable growth in the private sector.

My Lords, arising from the point that has just been made, does my noble friend agree that while it is important to grow our way out of the problem it will not be the case that we can grow our way out of the structural deficit? By definition, that is something quite separate from the possibility of growing one’s way out. This is indeed a very depressing report, although it is extremely helpful to have the figures which have been given. I have two points for my noble friend.

First, it is clearly extremely important that we should reduce the deficit as soon as possible, but what has not been mentioned at all is the extent to which it is proposed to fund the deficit meanwhile. That does of course have very important implications for the level of aggregate demand. Can my noble friend say what the policy is on funding the deficit as we go along in advance of actually managing to reduce it?

Secondly, in the same context, one of the extraordinary things that happened under the previous Government was the policy of so-called quantitative easing. There is a general assumption, not least in the financial press, that this to some extent increased the money supply and therefore increased economic growth. As far as I can establish, that simply is not true, certainly in relation to the size of the so-called quantitative easing. The reason is that, while the Bank of England was increasing the quantity of money by purchasing it in the market, the Debt Management Office, which Mr Brown had removed from the Bank to the Treasury, was busily selling debt, so the two totally cancelled each other out, as far as one can establish. Does my noble friend agree that it is important to get the Debt Management Office back in the Bank of England so that two completely contrary policies are not pursued at the same time?

I am grateful to my noble friend Lord Higgins for his questions. Funding the deficit will be critical. As I pointed out, the level of borrowing will continue to rise throughout the forecast period to £74.4 billion in public sector net debt terms in 2014-15. The scale of the task should not be underestimated. What is critical to funding the deficit in a safe way is maintaining the UK’s credit rating and central to that is having a credible plan. The foundation stone of that credible plan is the revelation today of the true state of the nation’s finances, with some decent forecasts five years out on which all else, including the funding plan, can be built.

My noble friend’s second question was about the mechanics of selling debt. The Debt Management Office operates under a clear and transparent plan, which sets out exactly what the Treasury requires it to raise in the markets each year, consistent with the Budget forecasts. So far this year, the office has carried out that plan successfully and I have every expectation that it will continue to do so.

My Lords, if the Office for Budget Responsibility is to be independent, it is essential that its report should not be made a political football—we do not discuss the MPC’s report in the manner in which we discuss the OBR’s report. I particularly welcome the fact that the OBR has not only a fan diagram for the growth rate but one for public sector net borrowing. However, it would have been better if the report had presented a range of numbers for the debt and the deficit, as well as for growth. If growth is uncertain, as it surely is, especially as you go forward, all the numbers on the deficit and the debt are equally uncertain. I am speaking neither for nor against what the Government intend to do but, if we set up a specialist agency, it should perform its function in a way that illuminates the uncertainty surrounding public policy. That uncertainty will help the Minister’s right honourable friend the Chancellor as well as everyone else, as it is important not to pretend that the numbers for 2014-25 are hard and fast, as the noble Lord wishes to do.

My Lords, the noble Lord, Lord Desai, has made an important point by drawing attention to the huge illumination, to use his word, of the public finances and the forecast going forward. He makes some interesting technical points about how some of the data should be forecast. All I can say is that, if Sir Alan Budd is not listening now, I will take back the noble Lord’s points and relay them to him, as it is for him to decide how he lays out his forecasts in future.

My Lords, I congratulate the Government on their commitment to a level of transparency that we have never before seen. This is a wonderful first move. We should also congratulate the Office for Budget Responsibility on producing in a very short time what I think people have to accept is a very impressive document.

Does the Minister agree with my noble friend Lord Higgins that the report is a depressing read? Nowhere is it more depressing than on the fact that the structural deficit is much worse than we were previously led to believe. That makes the call from the noble Lord, Lord Eatwell, for an apology quite inappropriate, as we were led to believe that the structural deficit was different. The noble Lord, Lord Eatwell, has tried to pick holes in these calculations, but does my noble friend agree that realism and transparency will serve the people of this country much better than unwarranted and hidden optimism, which is what we had from the previous Government?

The Office for Budget Responsibility will be an important part of the way in which Budgets and economic management are handled going forward. It is clearly important that the status of the office is put on to a permanent footing as soon as possible, so that we do not have to take the criticisms from the Benches opposite about its independence and so on. Will my noble friend say when we are likely to get legislation to achieve that?

I am grateful to my noble friend Lady Noakes for her remarks and I echo her congratulations to Sir Alan Budd, the OBR and the Treasury officials who have been moved across into the OBR, as what they have produced in such a short time is a remarkable achievement. I agree that the report makes a depressing read in that it exposes how threadbare the inheritance from the previous Government was. On the other hand, it makes a stimulating and positive read, in the sense that we can use it as a basis on which to construct credible Budgets from now on. I also agree that it is important to put the OBR on to a permanent footing. Legislation will be brought forward as was set out in the Queen’s Speech.

I apologise to the noble Lord, Lord Sassoon, for not being here when he made his Statement. I was trying to get here but unfortunately I was blocked by the Armada in the Royal Gallery and had to go round another way. I thank him for repeating in this House the Statement made by the Chancellor of the Exchequer.

I am struck by the harshness of the Minister’s attacks on the previous Government and by the fact that he says that what the Office for Budget Responsibility has done is transparent. The difficulty is that what it has done has been done incredibly quickly and, as the noble Lord, Lord Eatwell, pointed out, has inevitably been based on assumptions that are difficult to make. The most significant thing is the political interference. I was amazed when the Minister said that the Chancellor of the Exchequer had spoken to Sir Alan Budd on 28 May, on 3 June and again on 9 June. In order to deliver on transparency, will the noble Lord, Lord Sassoon, tell us what was said in those conversations? If not, there will be doubt about the transparency.

My Lords, first, I am delighted that the noble and learned Lord, Lord Falconer, was not defeated by the Armada and managed to come through triumphantly, although it sounds as though it was a close-run thing. What I said and what I will repeat is that the Chancellor saw an initial view of the forecasts on Friday 28 May and saw a further update on Thursday 3 June. The OBR then shared its report with him on Wednesday 9 June. I am completely at a loss to know why sharing numbers and the final report should in any way impinge on the office’s independence—

Perhaps I might explain and give the noble Lord an opportunity to comment. This is the reason why the rule was made that numbers were not to be shared with Ministers except during the few days before. I am sorry that I did not make that clear.

I am grateful to the noble and learned Lord for the clarification, but to compare the process around the formulation of a report by the OBR with the release of numbers by the ONS is to compare chalk and cheese.

I begin by agreeing with the noble Lord, Lord Desai, who said that what is most welcome about this report is the extent to which it explains the uncertainties that the Government face in producing detailed economic forecasts. I also find the fan charts very welcome. It is extraordinary that the noble Lord, Lord Eatwell, finds them risible when they are used, as the Minister said, by the Bank of England and reflect a better view of reality than a single headline figure.

When the Office for Budget Responsibility was being established, the Government said that its members would be available to give evidence to relevant parliamentary committees. Given the importance of the work of the office, will the Minister urge its members to come before the relevant committee of your Lordships’ House—namely, the Economic Affairs Committee—so that there can be a forensic discussion of their work, along the lines that noble Lords would clearly like to see?

I am grateful to my noble friend Lord Newby. I will certainly pass on his request that members of the OBR come forward as he suggested. I am sure they would want to. It would reinforce the fact that, as they clearly set out in the foreword to their document, all the judgments in the forecast have been made or agreed by the Office for Budget Responsibility. There has been no ministerial involvement, so it would be entirely right that the office, rather than Treasury Ministers or anybody else, should answer for its forecasts.