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Office for Budget Responsibility

Volume 720: debated on Tuesday 6 July 2010


Asked By

To ask Her Majesty’s Government how the independence of the Office for Budget Responsibility is guaranteed.

My Lords, the Office for Budget Responsibility was established to make independent assessments of the economy and public finances. The terms of reference for the interim OBR describe its independence. They make it clear that the OBR’s assessments are produced with no ministerial involvement and that the OBR has the freedom to publish information at its discretion. Sir Alan Budd will be advising the Chancellor on the arrangements for the permanent OBR, including on issues relating to independence.

I thank the Minister for his Answer. Can he tell us whether it was the sheer incompetence of the Government in not letting the OBR have independence that led Sir Alan Budd to resign, or was it my Question? Is not the real problem the reliability of the OBR’s forecasts? Is the Minister aware that the OBR has itself expressed great uncertainty about its forecasts? In the circumstances, and given the possibility that it could be wrong, as many leading economists have said, is it set in stone that the OBR should continue with its actions even if the economy has actually gone into a downturn even faster than the OBR had forecast?

My Lords, in answer to the first question, I am sorry to pour cold water on a newspaper story, but Sir Alan always planned to leave in the summer. He was appointed to provide forecasts for the emergency Budget and to advise on the establishment of a permanent OBR, which is exactly what he has done and will continue to do. The noble Lord, Lord Barnett, asked, secondly, about what he described as “uncertainty” around the forecast. The whole point about the way in which the OBR has presented its forecast is that it has given a transparent probability distribution. The Treasury has never done that before in its forecasts; it has simply given a line and not explained the variability around it. Forecasts are of course subject to probability distributions and the OBR has followed the best practice for forecasts that the Bank of England and others have used for many years. As to what will happen if the forecasts change, the Chancellor has set a fiscal mandate and it is the responsibility of the OBR following each Budget or other fiscal event to report on whether his latest announcement still sets a course that has a 50 per cent or greater probability of meeting the mandate.

My Lords, does the Minister agree that it is vital for the OBR not just that it is independent but that it is seen to be independent? As the Government bring forward their detailed proposals for the OBR, will they ensure that, for example, it is housed outside the Treasury building and that all appointments to it are publicly advertised?

I thank my noble friend for reminding us that independence is at the core of what the OBR is about and key to its permanent design. The Chancellor will shortly receive the advice of Sir Alan Budd on the setting-up of the OBR and I am sure that Sir Alan will consider the various factors that my noble friend mentioned.

My Lords, did I hear the Minister right when he said, I think, that the fan charts that are to be found in the Budd committee’s report are best practice? In fact, as a matter of technical economics, they are not. Best practice is to publish confidence limits with appropriate probability distributions, which all the independent forecasters do—the Treasury is perfectly aware of that because it publishes their forecasts on the website. Given that the Government wish to save public expenditure, is not the best thing that can possibly happen the abolition of this body before it starts wasting even more money?

I defer to the noble Lord on what is best practice in economics. All I can say is that, as between Treasury forecasts that were produced in the past, completely untransparently and without distributions or fan charts, and Bank of England and other forecasts that had a degree of variability—I see the noble Lord nodding—I think that we have moved to a vastly better place.

My Lords, the heart of the Question relates to the independence of the OBR. The House should be reminded that the OBR is based in the Treasury; it is staffed by people seconded from the Treasury; press inquiries are handled by the Treasury; Sir Alan Budd’s appointment letter is signed by Mr Dave Ramsden, the head of economic forecasting at the Treasury; and Sir Alan reports to Mr Ramsden, whose work he is meant to be reviewing. Will Sir Alan, when he leaves, be subject to any restrictions on his future employment—in particular, taking the knowledge that he has gained in this post back to his occupation in the hedge fund community?

On an interim basis, the OBR has been housed within the Treasury to save costs and to give it early and easy access to Treasury models. Part of the advice that Sir Alan Budd gives will be about the location and other governance arrangements for the OBR on a full-time basis.

My Lords, if the Treasury was always aware that Sir Alan was going to leave in the summer, why has his replacement not been announced right away? Will the Minister give us the essence of the disagreement that has led to this resignation? Is it not substantially to do with the issue of independence, which my noble friend raised in his Question?

I thank the noble Lord for his questions, but I thought that I had addressed the main point already. There has been no disagreement. Nothing has happened. It has always been the case that Sir Alan Budd planned to leave in the summer and that is exactly what he is going to do. My right honourable friend the Chancellor is enormously grateful for the important work that he has done to get the office up and running. As for appointments, it would have been strange to appoint somebody before Sir Alan Budd had even announced his departure. The appointment process for his successor will take full account of the need for continuity.

My Lords, is my noble friend aware that in nine out of the past 10 years Treasury forecasts for growth exceeded the actual growth levels? Is he therefore not entirely entitled to review the process by which government statistics are worked out?

I thank my noble friend, who points out that Treasury forecasts have been as fallible as anybody else’s. That underlines the importance of our now having an independent office up and running to make the forecasts for us.