Clause 3

Budget Responsibility and National Audit Bill [Lords] – in a Public Bill Committee at 12:00 pm on 1 March 2011.

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Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury) 12:00, 1 March 2011

I beg to move amendment 7, in clause 3, page 2, line 17, at end insert—

As you can see, Dr McCrea, the Opposition are doing something of a double act and I am alternating with my hon. Friend the Member for Nottingham East. I was about to refer to him as the hon. Member for Shipley, which would have raised more than a few eyebrows. It would be quite entertaining if the hon. Member for Shipley (Philip Davies) were on the Committee and giving his views on these matters. I do not think I have ever been on a Committee on which he has served. Perhaps the Government Whips Office think he is better used on a Friday for private Members’ Bills when he does a sterling job filibustering, but I digress.

The amendment highlights our difficulties in discussing the operation of the Office for Budget Responsibility. It would be difficult to have a clause stand part debate on this clause because everything that relates to the day-to-day functioning and governance of the office is contained in schedule 1. We will probably reach that schedule later this week. The substance of what we have to say will probably end up being debated then. The role of the Treasury is significantly changed by the establishment of the OBR. Certain functions are removed from the Treasury and, rather than simply being put at arm’s length, they are put on an independent footing.

Clause 10 repeals the fiscal framework that was set up by the previous Labour Administration, so it repeals the 1998 provisions and the code for fiscal stability. It repeals the Fiscal Responsibility Act 2010, which set out the previous Chancellor’s mandate to halve the public sector net borrowing requirement as a proportion of GDP by 2013-14. It also repeals the Industry Act 1975, which put a requirement on the Treasury to provide biannual economic forecasts. The OBR will now have the primary role of making such forecasts.

Questions have already been asked about the overlap between OBR forecasts and Government announcements and whether it is happy coincidence that certain forecasts are made at certain times. It is important that there is some way of documenting or formalising the relationship between the Treasury and the OBR. We have included the Bank of England in the amendment as well because the Bank has a similar role to the OBR in monetary  policy. Some of the structures, as we will come on to discuss, will also be quite similar to the role of the independent Monetary Policy Committee and its relationship with the Treasury Committee. It is the similar concept of having that arm’s-length, independent role of forecasting, advising and making decisions.

It is important that there is understanding of how the relationship between the OBR and Treasury will operate. The underlying concern is that the Treasury should not interfere in the work of the OBR. When we get to the amendments tabled to schedule 1, we will debate the provisions in more detail. For the OBR to do its job properly, it has to be adequately resourced and have a budget of its own. We have seen in countries such as Canada and Sweden that when their equivalent of the OBR said things that were not entirely palatable to the politicians, their budgets were cut, so they were not able to do their job properly. I am sure that we will come on to that and debate it at the appropriate time.

Perhaps there are echoes of the tripartite agreement between the Financial Services Authority, the Bank of England and the Treasury—[Interruption.] The Minister says from a sedentary position, “That didn’t work very well.” I would not accept all her criticisms of the way it worked. The concept it established was that if there are three different organisations—in that case, the Bank of England, the Treasury and the FSA—that all have a role in financial regulation and in looking at the broader forces at work in the economy, that relationship needs somehow to be put on a formal footing. We are suggesting through the amendment that there should be something similar.

We are also suggesting that there should be a role for Parliament in scrutinising that relationship, and that a memorandum of understanding should be laid before Parliament within three months of the Bill becoming law. If the Minister does not think that there should be a formal arrangement such as that, will she elaborate on exactly how the relationship will work and be monitored? How does she think Parliament will be able to challenge the relationship if it is seen to be out of kilter; for example, if the Treasury is seen not to be allowing the OBR to do the job that it has been set up to do, or if there is not sufficient co-operation between the Bank of England and the OBR, which, given its economic forecasting role, I imagine would be quite important? Does she think that there should be a formal memorandum? If not, what else would she put in place?

Photo of Alison McGovern Alison McGovern Labour, Wirral South 12:15, 1 March 2011

I should like briefly to emphasise the remarks made by my hon. Friend the Member for Bristol East. Of course, the roles of the bodies that are working on economic stability in the Government’s fiscal position are interconnected, so the amendment is important. Again, if there were a crash, a lack of appropriate regulation, or a need for cross-working between the OBR and the Treasury, it would be incredibly helpful for Parliament to understand, ahead of time, how that might happen or what the rules of the game might be. We can only try in Committee to set up institutions and bodies that are fit for purpose in advance of knowledge of such events. In doing so, it is important to accept that their roles are necessarily interconnected.

I would appreciate the Minister’s comments about division of roles and cross-working. Is it worth exploring what work we can do ahead of time to understand how that would work, perhaps, as the amendment suggests, through some kind of memorandum of understanding?

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

I shall briefly discuss the memorandum of understanding in relation to the OBR and the Bank of England, then I shall talk about it in relation to the OBR and other departmental bodies, including the Treasury. I shall try to address the point made about interference and independence.

The OBR and the Bank of England are independent bodies that have different functions and will make their own judgments. Obviously, the Bank of England has a monetary policy and financial stability role, whereas the OBR’s role is to examine and report on the sustainability of the public finances. Interestingly, the chair of the OBR has said that he expects the OBR and the Bank of England to have common interests, and that they may regularly exchange views. Ultimately, however, whether working relations are formalised in a memorandum of understanding is rightly a matter for the independent OBR; it is not a matter for primary legislation.

Hon. Members have mentioned the tripartite agreement, which, as we saw, spectacularly failed. There was, however, a memorandum of understanding between the Bank of England, the Treasury and the FSA. We think that in future it should be for the independent OBR to decide how it wants to work with the Bank of England.

On the OBR’s working relations with public bodies and the Treasury, as the Treasury Committee noted, given the size of the OBR and the nature of its work, it will need to work closely with other public bodies. I agree that such a working relationship must be clear and transparent.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

Before the Minister moves on to the broader points, will she clarify what she means by its being a matter for the OBR to decide how it wants to work with the Bank of England and, presumably, the Treasury? What would happen if those bodies had different ideas about the Bank of England’s role? They might have different ideas about providing information, about meeting and so on, and those are the kinds of matters that a memorandum of understanding would contain. What if the OBR meets resistance from the Treasury and the Bank of England in relation to what it thinks is necessary for it to do its job?

The amendment would put that matter in the public domain, because a formal memorandum of understanding would be laid before Parliament and debated in the way that we mentioned when we discussed the amendments to clause 1. If it is up the OBR alone to decide how it wants to work with those bodies, it is an undercover—

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

Well, the Minister says that, but we are not suggesting that we should dictate to the OBR how it works with those bodies. Our concern is to protect the OBR by making sure there are guidelines for it to be able to do its job properly. That includes ensuring that the relationship between it, the Treasury and the Bank of England—that three-party working—is set up in a way that best benefits the office.

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

First, let us distinguish between the need for a memorandum of understanding between the OBR and the Treasury—with which I agree—and whether the Bill should tell the OBR how it should work with another independent body, the Bank of England. I do not think it is for us to dictate to the OBR how it should work with the Bank of England. That is rightly for it to decide. I do agree that we need a detailed memorandum of understanding between the OBR and the Treasury, which is in preparation. We are also preparing detailed memorandums of understanding between the OBR and Her Majesty’s Revenue and Customs and the Department for Work and Pensions. That is line with recommendations from the Treasury Committee, when it looked at the issue last year. Those memorandums of understanding will set out roles and responsibilities for each body, and will hopefully ensure that working relations are accountable and transparent. In doing so, they will support the independence of the OBR.

Photo of Alison McGovern Alison McGovern Labour, Wirral South

Will the Minister clarify who will publish those memorandums of understanding, especially in relation to HMRC and DWP? Will it be those Government Departments or the OBR?

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

We are still in the business of putting together the detailed memorandums. To the extent that the OBR is going to be—and should be—independent, we will need to talk to it about how to tackle publishing the memorandums of understanding. They will be in the public domain and ultimately there will be a shared document, because they will set out a working relationship between the various parties that they concern. We agree that something needs to be in place, and the charter establishes that that will happen. We think that the independent OBR needs to work out how it is going to work with the independent Bank of England. I hope I have now addressed the concerns of the Committee.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

I am not sure that the Minister has, although it is something that is difficult to tease out until we get to more detail on how the OBR will be governed, funded and all those other issues. The obvious concern is, given what has happened in other countries, that an office of budget responsibility can seem like a good idea at the time. As my hon. Friend the Member for Nottingham East said on clause 2, the idea of the OBR was announced to an extent as a political mechanism. It made the point that we needed arm’s-length economic forecasts; that we needed to divorce economic forecasting and some of the OBR’s other responsibilities from Government; and that we needed less political interpretation and more reliable empirical evidence and interpretation of economic data. It is widely accepted that it was announced by the Chancellor as much for political reasons as for economic management ones.

The OBR is finding its feet and is already functioning on a non-statutory footing. As we reach a situation where it starts to function on a statutory footing, it may not seem to the Chancellor such a good idea to have set up such a body. As the forecasts are announced, with some criticism of the Government, and as some conflicts arise, one can imagine the Chancellor thinking, “I have created a rod for my own back.” That is why we are concerned that we do not have the situation that arose in Sweden and, I think, Canada. When Ministers there  were unhappy with what their equivalent of the OBR had done, they said, “If you carry on like this, we will cut your budget, so you can’t do your job properly.” If the relationship broke down here, I cannot imagine that the Chancellor would be so indiscreet as to say something like that publicly about the OBR. None the less, one can imagine that behind the scenes there might be efforts to curb its activities, to rein it in and to try to make it a little more helpful to the Government of the day. That is why we think that the measures should be a little more detailed.

I am glad that the Minister has confirmed that there is a memorandum of understanding between the Treasury and the OBR. I did not quite catch the Minister’s answer to my hon. Friend the Member for Wirral South about the efforts that would be made to put the memorandums of understanding with the DWP and HMRC in the public domain. Perhaps the Minister will update me on that and say not just whether these memorandums of understanding will be put in the public domain but whether there will be an opportunity to challenge them. It is not so important to challenge what is in the memorandums, but we should have the opportunity to scrutinise them. If the OBR felt that the DWP, the Treasury or HMRC were not adhering to the spirit and the letter of the memorandums, Parliament should be made aware of it and either the Treasury Committee or Parliament should have a role in sorting it out, rather than the squabble being conducted on the financial pages of the newspapers. Will the Minister say to what extent the detail of the memorandums will be made public and whether we as parliamentarians could use it to hold the parties responsible to account?

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

I assume that the hon. Lady has finished summing up her proposed amendment, or is she just asking me to intervene?

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

If I finish my summing up, we move to deciding on whether to vote on my amendment. If the Minister wants to respond, she must intervene on me. I will then respond to her point when I continue summing up.

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

Rather than intervening every time the hon. Lady asks a distinct question, I will listen to her questions and come back to them when I respond. That will give me a better chance to respond to her whole argument.

Photo of William McCrea William McCrea Shadow Spokesperson (Justice), Shadow DUP Spokesperson (Home Affairs), Shadow DUP Leader of the House of Commons

We will be dealing with the amendment, and whether it is to be pushed to a vote, before the stand part debate in which you will be responding. When Kerry McCarthy is finished, we come to the decision on the amendment.

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

Thank you for that clarification, Dr McCrea. In response to the points, the memorandums of understanding, as I explained earlier, will be published as joint documents. The independence of the OBR is what this Bill puts in place—in terms of the people who run it, how it is set up, the governance structure and the OBR’s relationship to the Treasury and Parliament. The hon. Lady specifically mentioned the budget. She will be aware that the spending review gave the OBR a  settlement over five years, so there is no question, certainly for the duration of this Parliament or Government, that pressure will be put on the OBR through its budget.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

I thank the Minister for that clarification. I still have some residual concerns about how the relationship will work, but perhaps it is something that can be revisited once the structures have been in place a bit longer. I certainly hope that as we come to debate the role of the OBR in the months and years to come, we can assess whether the relationship between the office, the Treasury and the Bank of England should be discussed. On the basis of the debate that we have had to today, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

I do not have much to say, as this two-line clause simply states that there will be an Office for Budget Responsibility, and I think that we all accept that there should be one. It would have been helpful to debate schedule 1 with the clause, as it is difficult to say anything about the establishment of the OBR without doing so, but we will move on to some of the issues that we would have raised in this clause stand part debate when we reach the schedule.

Question put and agreed to.

Clause 3 accordingly ordered to stand part of the Bill.