Item 3 is evidence by videoconference for our inquiry into proposals for an independent fiscal body.
I welcome to the meeting Robert Chote of the Office for Budget Responsibility. I apologise to him for the fact that the previous evidence session overran considerably, and I thank him for his patience about that and the technical difficulties. As he and committee members are aware, we have not been able to zoom in on him as much as we would like. We will not be able to read his expressions, but we will certainly hear his voice.
I understand that you do not wish to make opening comments, so we will move straight to questions, if that is okay.
That is fine.
I shall fire away with the first question. You have probably seen the report of the fiscal commission working group, which was sent round all the committee members last week. That group recommends that the Scottish fiscal commission
“should draw upon the roles of the Swedish Fiscal Policy Council and the Irish Fiscal Advisory Council.”
Did the OBR look at examples from other countries? Did the UK Government look at international examples when the OBR was established?
Yes, the UK Government looked at such examples. It had a consultation period in which it talked to people who operate fiscal councils in other countries about their models. It is fair to say that the operating model and the structure and role of the bodies differ widely from country to country. That reflects a number of factors, one of which is the problem that the institution is designed to resolve.
In the UK, the context was that people felt that ministers—who are responsible for publishing the economic and fiscal forecasts on which budgets and autumn statements are based—had on various occasions produced what were in some people’s eyes systematically overoptimistic forecasts that might have been influenced more by political considerations than by professional judgment. Concern was also felt about a moving of the goalposts on fiscal rules. The OBR’s structure therefore reflects the sense that it would focus on forecasting rather than, for example, on an absence of broader economic advice that might shape the structure of such bodies elsewhere.
Another important issue was the fact that the Institute for Fiscal Studies provides detailed scrutiny of the UK’s public finances on the basis of the publicly available information that the Treasury and others publish. If the Swedish model had been adopted in the UK, an obvious question to ask would have been whether that was a taxpayer-funded version of the IFS rather than something that would take the debate forward. The Swedish model—which consists of academics who do not produce the forecasts but who scrutinise the Government’s published forecasts and who comment on a wide range of public policy issues, such as labour market interventions—is in some ways more similar to the IFS than to the OBR.
It is particularly unusual that the UK Government has in effect contracted out to us the task of producing the forecasts that ministers were previously required by legislation to produce. That has not happened in a lot of countries, partly because the finance ministries in many of them would be extremely reluctant to have their fingers prised off the task of producing the official forecasts.
The form of the body needs to reflect the function, the problem that it is designed to resolve and the nature of the other institutions that already take an interest in that space.
The Organisation for Economic Co-operation and Development says that
“models from abroad should not be artificially copied or imposed”,
which you have emphasised.
The fiscal commission working group’s report emphasises the need for the Scottish fiscal commission to have
“skilled technical staff, positioned at arm’s length from both government and parliament.”
It also says:
“The most fundamental feature of any effective fiscal commission is its independence.”
How important is the perception of independence from the Government? What do you believe is the perception of the OBR’s independence from the Government?
Independence is central to the functioning of such bodies. Our whole aim—particularly in the forecasts that we produce—is that people should believe that we produce forecasts on the basis of our best professional judgment and not politically motivated wishful thinking.
That is not to say that everybody will agree with the forecasts. The nature of economics and fiscal forecasting is that there are bound to be differences of view, but we hope that people can trust in our integrity in producing forecasts.
There are formal ways of demonstrating independence through, for example, how the legislation is set up and the process for appointing and removing members of the fiscal council. Those are important, but the absolutely crucial issue is transparency in not only the process and the nature of our interactions with officials but the outputs. If you compare our forecasts with those published in the pre-OBR era, you will find that our forecasts have much more quantitative detail and much more of a focus on uncertainty around the central forecasts, rather than a simple focus on the forecasts themselves.
I agree that independence is absolutely crucial and I think that formal mechanisms to establish that are great and welcome, but at the end of the day you establish a reputation for independence by how you do the job that you have been given. However, you should never expect everyone outside to agree with everything you say.
The vast majority of respondents to our call for submissions have recommended that the body be appointed by and accountable to the Parliament. Where should we strike the balance between the Parliament and the Executive?
That depends very much on the body’s exact remit. In a sense, the OBR is jointly accountable to the Chancellor of the Exchequer and the Parliament via the House of Commons Treasury Committee. The chancellor will say who he wants to fill my job and my two deputies’ posts but the Treasury Committee has the right not only to question the person before they are appointed and make recommendations but to veto that appointment. Similarly, I cannot be sacked by the chancellor without the Treasury Committee’s say.
That said, I think that, given our remit, it would be very difficult for us to be solely accountable to Parliament rather than to the Executive. We have to produce draft forecasts in a certain form and on a timescale that allows the Treasury to make decisions on and publish their budgets and autumn statements and allows us to publish our forecasts at the same time. Because it is necessary to have confidential interaction with ministers and officials in the run-up to budgets and autumn statements, we have a responsibility to them as well.
If an independent fiscal body in Scotland were to have a similar relationship before the publication of forecasts and material by the Scottish Government, similar complexities would arise. However, if the body will simply look at and publicly comment on the Scottish Government’s outputs, it might be much easier and cleaner to link it more directly to the Parliament.
International experience would suggest that one of the arguments for making a body accountable to the Parliament rather than linking it to the Executive is that doing so provides an additional safeguard of independence. Ironically, however, the fiscal councils in other countries—Hungary and Canada, for example—that have come under political pressure are those that actually report to Parliament. As a result, it is not clear that such a link provides a greater guarantee of protection than there would be with a more mixed process.
One reason why we are setting up a body is to have more accurate forecasting for Scotland rather than extrapolations from UK figures. We have received a letter from you on that subject, but can you talk us through how you believe we can do that in Scotland?
Are you talking about the specific forecasts of potentially devolved taxes or more broadly?
The specific forecasts of the devolved taxes. After all, one of the issues that we have encountered is that some of the OBR’s projections for the Scottish rate of income tax and the land and buildings transaction tax derive from the stamp duty land tax.
One thing I would caution against is the idea that some group of people somewhere is going to give you perfect forecasts all the time. That is not the nature of the business. There might be great sages out there with perfect crystal balls, but I wish you good luck trying to find them. I suspect that doing so might not be so straightforward.
One must differentiate between the Scottish rate of income tax and other devolved taxes. Given that the former will continue to be operated by Her Majesty’s Revenue and Customs, we and whichever body will play the same role in Scotland will have to interact with it because it will have the information about how the tax system is operating, the data sets and so on. It will be hard for a Scottish institution to bring more information to bear than that which HMRC already has available.
11:15The difference with regard to accuracy will, I hope, come with the devolution of the tax and the explicit flagging of Scottish taxpayers, as it means that we will not have to rely on the survey of personal incomes to estimate the Scottish proportion of income tax and that it will be clear who is and who is not a Scottish income taxpayer. However, I understand that that is not going to happen any time soon before devolution.
Because with LBTT the Scottish Government has designed an entirely new tax, it will presumably have to decide what information it will need to collect to be able to design the tax as it wants and to set the appropriate rate and rules, and we will have to talk to whatever body is undertaking that work so that we can provide forecasts for it.
If we consider the OBR’s relationship with HMRC when we put together most of our tax forecasts, a question that one might ask is who is going to provide the expertise and forecasting knowledge for LBTT. Will that expertise be found in the Scottish Government or revenue Scotland, or will this new body provide it on its own?
To put this in context, the OBR has only 17 staff plus the three of us who sit on the committee. Ahead of each forecast on stamp duty, for example, we talk to the stamp duty experts in HMRC, who make suggestions about how the modelling might be improved, how the latest data that they have received might be interpreted and so on. We then iterate that and ask them to make different assumptions, or we indicate whether we are happy with the model that they are using. At the end of the process, we have a forecast that we are happy to own, but it is HMRC that has the expertise and actually turns the handle.
To go back to your earlier question, I think that a crucial issue in the design of the Scottish institution will be where the expertise will lie with regard to that Scottish-designed and Scottish-administered tax and what relationship the body should have with either revenue Scotland or whichever bit of the Scottish Government is responsible for this work.
In short, it is a different story for the different taxes, notably the one that will be run UK-wide and the other that is very Scotland-specific.
I should also say that the landfill tax, the legislation for which is going through Parliament, is similar to the LBTT in how it settles into the picture.
Now that the OBR has been going for a number of years, how has your forecasting begun to diverge from the Treasury’s? What are the key differences in the organisations’ forecasting?
Simply with regard to relative accuracy, one could compare the size of our errors in our forecasts of the budget deficit, receipts and spending as a share of GDP, for example, with the average size of the errors made in the pre-OBR era in the chancellor’s forecasts. For what it is worth, I should say that the errors in our forecasts are on average somewhat smaller than those in the pre-OBR era but, then again, I do not think that that is necessarily comparing like with like or that you could draw from that the conclusion that our forecasts are better than the previous forecasts any more than you would be able to say that we were doing a worse job if the opposite were true. You are just not comparing comparable periods of time.
On the mechanics of how the forecasting is done, I do not think that there are enormous differences. Obviously, as the Treasury is no longer publishing a forecast of its own, it is hard to judge whether it has moved off in a different direction or produced different forecasts from the ones that we produce. The Treasury uses the economic model and gives the chancellor advice on policy on an on-going basis, so it might look at scenarios and so on, but we do not see that material, so I do not know whether the Treasury would have forecasts that look very different—it is not publishing them in the same way. I would not make the argument that it is possible suddenly to reinvent the science of forecasting, with a big set of methodological changes.
In your letter to us, you pointed out the difficulties in making forecasts when you rely on data that are available only with a long time lag. You said:
“An estimate for 2011-12 will be available after our December 2013 forecast and will be incorporated into our March 2014 forecast.”
Is there a possibility that the time lag could be reduced, or must you live with it in the months and years ahead?
We must live with it, but only up to the point at which Scottish taxpayers are flagged. There is a problem at this stage, in that we have to rely on the survey of personal incomes as the way of identifying the Scottish share. In the longer term, forecasts will become easier to do because people will be specifically flagged.
Thank you. I will now bring in other members.
The OBR’s paper in response to our call for evidence emphasised the importance of an independent fiscal body’s ability to have
“access to information and analytical capacity from HMRC”.
I get the impression from your paper and from what you said in your exchange with the convener that you think that such access would be vital to the effective working of an independent fiscal body that the Scottish Government set up. Is that the case?
That is absolutely the case. As you rightly point out, the issue is not just data but analytical capacity. Of course, some data are publicly available and you do not need a specific right of access to them, but—to come back to my discussion with the convener about the model for how we interact with the experts in HMRC who produce data on particular taxes—having access to such analytical capacity is crucial.
The much larger fiscal councils produce much more work in-house. For example, in the Netherlands, the United States and Korea, we are talking about offices of 100, 200 or 300 staff, which is not the model that we are talking about here. If your independent fiscal body is to produce a forecast itself, it will need access to the analytical capacity in HMRC.
There is a slightly different story if, rather than the independent fiscal body producing the forecast itself, the Scottish Government—or revenue Scotland or whoever—publishes the forecast and the independent fiscal body then tries to scrutinise it from outside, which is the sort of job that I was doing at the Institute for Fiscal Studies before I took on my current job.
In that case, there are some taxes for which the publicly available information gets us most of the way to being able to judge whether or not a forecast is sensible. On value added tax, for example, the publicly available information and the models that academics can construct allow us to make a pretty good second guess without having access to additional information.
However, for other taxes that is much more difficult. For example, an issue arises when taxpayer confidentiality is in question. When it comes to producing forecasts for corporation tax, given that quite a lot of corporation tax comes from a relatively small number of taxpayers, HMRC will have more detailed information about the relationship with specific taxpayers. It would be inappropriate for us to have that information, but obviously we can benefit from HMRC’s anonymised—as it were—interpretation of the signals that it is getting from relatively large taxpayers.
That is absolutely crucial; indeed, a key part of our legislation is to have written into it a right of access to the information that we believe that we need and a process to follow if we do not think that we are getting it.
How you ended your answer is very helpful because I want to turn to that matter, although you have pre-empted my question.
Your submission states that the power that gives the OBR that “right of access” is set out in the Budget Responsibility and National Audit Act 2011. From everything that you say, you seem to have a very good working relationship with HMRC. Although you have not said that you have encountered any problems in accessing information, there is the potential for that to be the case. I think that I caught you right when you mentioned that the legislation sets out the steps that you can take if the information that you require is not forthcoming. Will you talk us through that process?
The legislation gives us that right of access, but the detail is not set out in the legislation per se.
We have set up and agreed a process for the exchange of information; given the model that we have, the Government needs some information from us, too, so there is a two-way street of rights and responsibilities. We have approached that exchange by agreeing a published memorandum of understanding between ourselves and the largest departments with which we have most interaction over the forecast. Those departments are HMRC for most of the tax issues, the Department for Work and Pensions on most of the welfare spending issues, and the Treasury. We do not rely a great deal on the Treasury’s data or analytical capacity; rather, we look to it for details of the policies that are being thought about for particular budgets or autumn statements.
As part of that memorandum of understanding, we have a committee, with all those bodies represented on it, that looks at the forecasting process. It also looks at how we are dealing in each forecast with newly announced measures. That committee is an initial forum in which we would raise concerns if we felt that we were not getting what we needed. The process can be escalated so that a concern would be dealt with between me and the permanent secretary of the relevant department. In practice, the ultimate deterrent is that, if I really felt that I was being stymied or not given the information that I need, I could pop up on the news and say so loudly and publicly.
Indeed.
You have created the memorandum of understanding with the departments, but it is a point of law that the OBR is entitled to that information. That begets the question whether any independent fiscal body that is set up by this Parliament should have similar statutory powers.
I think that it should. As I say, that is particularly important in an environment in which such a body is tasked with producing the forecast rather than simply commenting on a forecast that is produced by the Scottish Government or some other Government agency. In the latter world, the body would still need access to information that tells it how the Government has reached its forecast. That right of access to capacity and data is important in the scenario in which a body has to comment on a forecast that is produced by another organ of Government, but it is important in spades when it has to produce and sign off a forecast itself.
I am not sure whether you will feel able to comment on this, but I will ask the question anyway. You have said in strong terms that it would be important for an independent fiscal body to have access to information from HRMC and for that to be set out in statute. However, the Scottish Parliament does not have legislative competence over the HMRC. Would that be a problem for us?
I am not an expert on those matters. However, that reinforces to me the importance of the memorandum of understanding. I think that the HMRC has a memorandum of understanding covering some of those areas but, if a new body were created, it would be important to think in the round about what rights and responsibilities everybody should have.
There would be a particular issue if such a body wished to produce a forecast for the devolved taxes that was based on a completely different view of how the economy might evolve. In that case, you would need the analytical capacity to get HMRC to investigate what the SRIT produces under that alternative economic scenario. A debate would be needed about the amount of additional capacity that you might need to call on, and it would seem very sensible to be as clear as you could be about that in a memorandum of understanding.
11:30
That is very helpful, Mr Chote.
My final question is on a slightly different issue. In your submission, you say:
“For our part, the OBR will continue to need to incorporate forecasts for the devolved taxes in its own forecasts for the UK public finances. But these may not need to be as detailed and disaggregated as those that the Scottish Government might desire.”
You talked about that a little in your exchange with the convener. What do you mean when you say that the forecasts
“may not need to be as detailed and disaggregated as those that the Scottish Government might desire”?
It is really a question of the fact that we need aggregate estimates of the three or four taxes that are under discussion here to include in our forecasts. In the longer term, once they have been devolved, we are looking at their materiality for the UK public finances, which is what we have been created to consider. On the aggregates and landfill taxes, for example, the Scottish Government may have good reason to worry more about the relative amount of revenue that would come from those sources than we would in the context of the UK-wide position.
As I have said, the Scottish Government and the new body might want to have a more detailed view of the numbers than we currently find necessary for the UK forecasts and for the responsibilities that we have been given under the Scotland Act 2012. It is not for me to say how much detail or analytical work the Scottish Government would consider necessary or would want to do in that area, but it would seem logical to me that it might want to do more on those specific taxes than us, from our primarily UK-wide perspective.
Thank you for the information that you have given already.
In the evidence that we have received, there has been some debate about the role and remit of an independent body, which some have argued should be purely technical. In your submission, you argue—as does the Slovakian Council for Budget Responsibility—that there should be an advocacy role that looks at what should happen as much as assessing and analysing what will happen. What type of advocacy are you currently involved in, if any? What discussions have you had about developing an advocacy role?
We are very much at the end of the spectrum that does not have an advocacy role. By international standards, we are fairly tightly constrained to looking at the implications of the current Government’s policies; we do not talk about alternative policies that the current or a future Government might wish to implement, and we certainly do not recommend such policies.
Similarly, on individual tax or spending measures that might be announced, it is explicitly laid down that it is not for us to say whether those are intrinsically a good or bad idea, tempting though it frequently is to offer views on those things. The Oxford academic Simon Wren-Lewis has described that as the most extreme example of positive analysis, in the sense that we are very much confined to providing positive analysis rather than normative policy recommendations.
A body such as the Swedish Fiscal Policy Council would be much more inclined to do a report that looked at interventions in the labour market, for example, saying whether they were sensible and recommending ways in which they could be better. That is really a decision that needs to be taken by the Government in question when the new body is being set up.
In the UK context, one of the reasons why one might be pretty happy with a narrowly focused remit for the OBR is that we already have the Institute for Fiscal Studies, which talks quite a lot about the merits of particular decisions. I used to do a lot more of that in the eight years before I did this job. When we made recommendations as to how the tax system might operate more effectively, we might say, “The Government has announced a new tax and it is really good,” or, “The Government has announced a new tax and it is daft, for the following three reasons.”
There is a challenge. Some people would fear that the more the body was seen to have an advocacy role and, therefore, ended up taking sides in what may be quite contentious debates between the parties in the Parliament, the more the perception of the independence of its day-to-day work of examining particular tax revenue streams and judging whether the forecasts were appropriate would be undermined.
It is beneficial to have independent analysis and commentary on the wisdom of particular tax decisions. The IFS fulfilled, and still fulfils, a valuable role in that regard. Whether you want the official fiscal watchdog to play that role or to have a slightly more confined remit is a slightly separate question.
We have received evidence that suggests that, if we established that advocacy role, we would give the impression of having brought the organisation into the political arena even if we had not actually created a political entity. Do you concede that that is an inherent danger in going down that road?
It is a danger. Over many years, the IFS has commented a lot on the wisdom or otherwise of particular policies. It has been doing that for 40 years, and there was general acceptance that we were non-partisan and independent. We were helped by the fact that no political party has a monopoly of wisdom or folly so, when commenting on parties’ policies, we tended to annoy everybody some of the time.
It is more problematic to put a newly created body into such a contested arena. One of the reasons why the OBR was given such a focused remit to start with was so that we did not hamstring the newly created body by throwing it straight into a politically contested area—partly because there were other bodies to do that anyway and partly because it would have distracted attention from building credibility in the core function.
Audit Scotland raised the issue of the amount of work that any new body would undertake. Its concern was that, if the amount of work that the body could do was restricted, that could hinder its ability to attract the necessary talent to be credible. There would have to be what Audit Scotland called a “critical mass of work” to enable the organisation to attract staff of the quality and standard to give it credibility. Do you have any views on that?
I can understand that concern. Although the OBR’s mandate is relatively tightly defined, it involves a lot of substantive, important and interesting work: producing a complete set of macroeconomic forecasts and fiscal forecasts. If you were creating a body whose function was simply to scrutinise somebody else’s published estimates of the likely revenue stream for the four devolved taxes, that might seem a less attractive role than one with a broader scope.
It comes back partly to the remit of the new body and how it would mesh with whoever in revenue Scotland and the Scottish Government had the expertise in the devolved taxes under consideration. For instance, if you wanted the body to comment on North Sea receipts, which are not a devolved issue but are clearly of great interest and a matter about which people might want to talk, you could give it a greater breadth of responsibility than the relatively narrow one to which the cabinet secretary referred with regard to the particular devolved taxes on which we are focusing. I can see the force of that argument.
You and others have said that transparency is extremely important, but we have also mentioned confidentiality, mainly, I think, in relation to confidentiality between the OBR and the Government. I could be corrected on that if there are other groups with which you have a confidential relationship, such as HMRC, perhaps. Is there sometimes a conflict between transparency and confidentiality?
I do not think so. Some people would argue that there is such a conflict. For example, the former head of the Swedish Fiscal Policy Council said that he felt that the relationship that we have with ministers and officials in the run-up to budgets and autumn statements was a severe barrier to genuine independence. He questioned whether we could be genuinely independent when we have private conversations about policies that are under development.
My response is that if we did not have such a relationship and did not play that role, I am not sure that we would be adding much to the work that the Institute for Fiscal Studies does already. There is a trade-off: if we are to add value in the context of the role that we have been given, such interaction has to take place for us to do more than it is possible to do on the basis of publicly available information.
If a body has a relationship with ministers and officials such as the one that we have, the key point is that the body must be as transparent as it can be about the nature of that relationship. For example, on our website we post a list of any substantive interactions that we have with the chancellor, his private office or his special advisers. We also make it clear when we have provided particular draft forecasts or heard about final decisions by the Treasury on budget policy measures. We are as transparent as we can be about that.
We must respect the confidentiality of a relationship in which the Government comes to us some weeks ahead of the budget and says, “This is the list of measures that we are thinking of announcing in the budget.” It is not for us to share publicly information that is only made public in the appropriate way—when it is announced to Parliament. However, some of those policy measures will drop off the list before we get to the day itself. The Government might consider a particular measure, but at the tail end of the process it might decide, for one reason or another, not to do it. It would be wholly inappropriate for us to rush out and do television interviews in which we said, “You’ll never guess what the Government was thinking of three weeks ago.” I do not think that that would be an appropriate way to act. We must respect that confidentiality.
Similarly, I would expect the Treasury to respect the confidentiality of, for example, the draft forecasts that we provide it with in the run-up to autumn statements, which are all work in progress. The final view that we take is the one that appears on the day of publication. If we are to have a sensible working relationship in which we can develop the forecast progressively over time, we would expect the Government to respect the confidentiality of that work as well.
Thank you very much—that was extremely helpful.
On the concept of communicating directly with the general public, you suggested that you could threaten to do that if a particular Government department, such as the Treasury, was not providing data. Is that the main area in which that power would come in? The suggestion has also been made that, if a report were misinterpreted, you could come out and say publicly that it was being misinterpreted. Are there other areas in which the power to be able to go directly to the public is useful?
The issue partly comes down to the remit that the proposed body is given. Our overarching remit is to report on the sustainability of the public finances. In doing that, the legislation gives us the right to talk openly to the public about those issues on which the Government might be placing less emphasis, for one reason or another. I think that it is important that we are able to do that.
The ability to correct a misinterpretation rarely needs to be used. Sometimes, misinterpretations are deliberate, but sometimes they are inadvertent. There was an episode not so long ago in which the Prime Minister gave a speech that suggested that we had a particular view of the impact of fiscal consolidation. I did not feel that that was an accurate representation, so I wrote a letter to him to set out publicly, for the avoidance of doubt, our actual position. We take such action sparingly and appropriately—we do not want to be intervening in the public debate every day, but occasionally it is necessary to say such things, and the organisation needs to have the right to do that.
Thanks very much.
11:45
I think that one of the main things in which the public will be interested is ensuring that the body is genuinely independent. As you know, most respondents to the consultation thought that accountability to Parliament would be the best way of achieving that independence. However, the examples from other countries that you gave were extremely interesting. Your view seems to be that because you engage with the Government, you must be accountable to the Government. However, it was not entirely clear to me why the two had to go together, as it were.
My view is that we should be accountable and responsive to both the chancellor and the Treasury Select Committee, but independent of both of them. I regard my ultimate responsibility in this job as being to the general public. We owe them our best judgment, whether or not the chancellor or other politicians like what we are saying. We have to come at it with that particular mindset.
As I said, we are matching transparency and accountability, so we need to explain why we have taken our decisions and made our judgments. At the same time, we are ultimately independent and are responsible for making those judgments. It should not be for the Parliament or the executive to try to make us make a different judgment when we feel that that would not be our best judgment.
Do you think that the model that you have is as good as we can get in terms of independence? Are there any ways in which you feel that your position can be made even more independent?
No, I am reasonably happy with it. If we look at fiscal councils in different countries over a period of time, we find that there is a roughly equal division between bodies that are parliamentary bodies—parliamentary budget offices—standalone institutions and bodies that are linked in some way to the executive. There is therefore no clear template out there for the exact relationship, because it varies from place to place.
Where I think that we have seen a notable trend over time for more of those bodies to have legal underpinning for their independence, typically through legislation or in other supporting documents or agreements. The preponderance of the bodies that have been created over the past 10 years have a legal underpinning for their independence. That is not to say that that is the case for some of the older ones. The Dutch fiscal council stands out as the obvious example because it is the oldest, having been around since the late 1940s, and probably has the best, or one of the best, reputations among the fiscal councils. However, for years it has been the least formally independent—in effect, it is part of the civil service. More recently, even the Dutch have decided to have a more formal legal charter, although I think that that will underpin an already established relationship in terms of the fiscal council’s independence.
Such legal underpinning is particularly important for newly created bodies. If a new body comes from nowhere, it needs to have that underpinning. Some countries that have established fiscal councils have attached them to existing bodies that already have a reputation and legal underpinning. The most obvious recent example is the French High Council of Public Finances, which has been explicitly attached to the Court of Auditors. We might argue that there is less need for formal underpinning there because the council is being attached to a body that already has legal underpinning and a long-established relationship. There can be wrinkles, depending on exactly how the institution is structured.
You talked about popping up on the news. Do you have any other recourse if you feel that your independence is being compromised?
Obviously, there is contact with the Treasury Select Committee, and if we were under any pressure as regards our specific functions under the Scotland Act 2012, I would come to this committee and say that I was unhappy with the way in which things were going. There is a direct parliamentary route. The organisation also has non-executive directors, and if we had a serious concern about the behaviour of the politicians we might talk to them as a sort of sounding board, and they could act as a conduit for concerns. However, I think that the knowledge that we would be public about any concerns, either directly to the public via the media or via the relevant parliamentary committee, is a pretty powerful deterrent against misbehaviour.
You might not want to comment on this, because the Labour Party proposed it. However, the public might think that it would be a good idea at election time if you had a role in costing and analysing party proposals. As I said, you probably do not want to comment on that, but I will ask you a factual question: what would have to happen for you to be able to do that? Would it be at the discretion of the Government or the Treasury Committee, or would the legislation have to change? How would that work?
There would need to be a change in primary legislation. The Budget Responsibility and National Audit Act 2011, which set us up, forbids that role. We have taken independent legal advice that that would need to change if we were to have that role.
Again, you can look across international examples. The most dramatic example would be the Netherlands, where there is a detailed formal process in which parties are invited to submit their manifestos or manifesto proposals to the Dutch fiscal council for them to be scrutinised. The fiscal council looks at the costings and at whether the policies are legally permissible and comes up with estimates of their economic, fiscal and environmental impacts. That quite dramatic process requires the political parties to come up with manifesto proposals considerably further ahead of the election than would be the case in the UK. The fiscal council publishes a report on that some way ahead of the election.
The Labour Party’s proposal falls a long way short of that in scope. It suggests that we simply look at the costing of individual tax and spending measures—the sort of things that would appear in the table of measures in a budget or autumn statement document—and scrutinise them in the same way that we scrutinise Government policy.
Independent scrutiny of manifesto proposals is a very good idea, but the official fiscal watchdog is not necessarily the body to do that. I spent eight years with my previous hat on at the IFS, which included two general elections in which we tried to do precisely that, which was an important part of the public debate during the election campaign.
Returning to our earlier discussion, I think that the other thing to bear in mind is that if we were to have that role, given that we are relatively small body that relies on analytical expertise in particular areas of tax and spending in HMRC and the Department for Work and Pensions and so on, the Government would have to be willing to allow, in effect, the Opposition parties access to that set of analytical resources. We might act as a gatekeeper but, certainly in the run-up to an election, that would have big resource implications for the analytical teams in HMRC and the DWP, as well as for us.
In paragraph 4 of your submission, you said:
“The second choice is whether you wish these revenue forecasts to be based on the same economic determinants”
and so on. I want to capture the significance of those economic determinants. Could they lead to big differences? Is the number of economic determinants significant? I would like some insight into what you have in mind in that paragraph.
There are two issues here that are worth distinguishing. One is that, even if one has a shared view of the UK-wide macroeconomic outlook, there is the question of how much adjustment one is willing and able to make for how things might be evolving differently in Scotland from the rest of the UK.
A good example is stamp duty. If we are thinking about what we will get in stamp duty, we come up with an estimate of movements in house prices and transactions for the UK as a whole. If we were thinking about receipts from stamp duty or the new LBTT in Scotland, we might be concerned with how housing transactions and house prices in Scotland were moving differently from those in the rest of the country, even if we felt that that was consistent with the overall UK forecast—we would still differentiate between the two. Obviously, we try to do that as best we can, with the resource and data limits that we have, in the way that we look at the Scottish shares of such things.
Alternatively, the Scottish Government might want to take a different view. It might think that we are overestimating the speed of the economic recovery and underestimating the extent of rebalancing. If so, would the new agency wish to produce its central forecast based on that alternative view? Ultimately, that would be an issue for the agency.
At the end of the day, we would still have to produce forecasts for those things on the basis of our macro-forecasts, because we are required to do that under our responsibility to generate our core forecasts for the UK. However, that is another reason why the body might want a greater degree of granularity in the data to look at different economic determinants for the purposes of testing how robust those forecasts are. Their materiality to the UK picture as a whole would be such that it would not be worth our putting in the same time and effort.
Thank you. That is helpful.
I suspect that the answer to my first question will be no. Is there such a thing as an optimal size for an independent fiscal body?
No. It depends on the role that it has been given. If we look at the big ones, the Congressional Budget Office in the United States is the classic example, and it has 230 people or thereabouts. That reflects the fact that it has to respond to requests to cost particular policies from members of both houses and members of both parties within them, and it has a much broader area of analytical work on public services, for example, which we do not have. Form has to follow function.
I managed to forecast your answer correctly, which I am pleased about. Will you reiterate the size of the OBR in terms of the number of staff?
Sure. My two deputies and I are the budget responsibility committee, and we are ultimately responsible for signing off the views that the OBR expresses. Working for us we have 18 civil servants, who split roughly equally between people who focus on the macroeconomic forecasting role, people who focus on the forecasting of particular revenue streams and public spending, and people who focus on related work such as the costing of newly announced policies that the Government is considering. There are some analytical and support staff as well, but the staffing splits roughly equally between those three areas.
A key point, which brings me back to the independence issue, is that the OBR has complete control over our employment policy. These people are not on secondment. We might have one or two people with us on temporary secondments, but these people are civil servants who work for us in the same way that civil servants work for other Government departments.
That is roughly the scale and the division and, as I said, the employment decisions are ours to take. We are not constrained by a requirement to take people from particular places.
Okay. Can I be clear on the appointment process for the top three jobs? Is it the case that the chancellor or the Treasury proposes individuals for those jobs and the Treasury Committee can simply say yes or no, or is there joint working to come up with candidates? How does that function in practice?
As you say, it is for the chancellor to make an initial proposal. Prior to that, there is a formal process of advertising the job and having an interview panel, which is run by the civil service in the same way as the process for any other major public appointment. The process results in a recommendation, which goes to the chancellor. They may be told, “We’ve interviewed eight people and three of them are potential candidates. Our recommendations are A, then B, then C.” The chancellor then has to decide who to propose. That is announced publicly, and then there is a pre-appointment confirmation hearing with the Treasury Committee, much as we are having today. That committee will talk about the person’s professional competence, independence and so on and, at the end of that process, the committee will say, “Yes, we agree with this appointment,” or “No, we don’t agree.” We have not yet had a situation in which it has said, “No, we don’t agree,” but if it said that, we would have to go back and restart the process. That has applied in relation to some other jobs, and the Government has had to go back and start again.
That is helpful. Thank you.
12:00
All my questions, with the exception of two points, have probably been answered in response to previous questioners. First, there is a perception that the OBR is very close to Government. If you were setting up a new budget responsibility body, would you do anything differently? Secondly, in the interests of clarity, what relationship do you have with the public other than making corrections on “News at Ten”? Is there any other relationship or connection with the public? How do you gather local knowledge, or do you never get out of the office?
No, I get out of the office. On the relationship with the public, given the nature of the material that we produce, there is quite a wide interest from a variety of stakeholders. Obviously, all the analytical material that we produce is available on our website. We hold press conferences to launch our reports, so there will often be quite a bit of media coverage of those. I also talk to various groups; for example, I meet the Trades Union Congress, address business conferences and talk to people in local government—I recently went to Manchester to talk to the Pro.Manchester business group. That is all useful in providing background information.
However, at the end of the day, we produce a forecast for the UK public finances. For that reason, we do not need to produce a forecast of GDP by region or by nation. Those things are important, and the Government and others will devote a lot of effort to such matters, but our remit is to produce an ultimate forecast for the UK budget deficit and public sector debt, so we do not end up going into that too much. A lot of people take a lot of interest in our forecasts, so we get freedom of information requests and requests from the public for more information on our forecasts. We try to be as helpful as we can in dealing with those.
On the closeness of our relationship to Government, in part that comes back to the nature of our remit. We need a close relationship with Government if we are to be in a position where, as the chancellor stands up to deliver the budget, we can provide a forecast on what we think will happen to the economy and the public finances as a result of the policies that he has newly announced that day. That is a necessarily close relationship.
Some people slightly overstress the idea that there should be a necessarily hostile bilateral relationship, with us on one side of the table and “the Government” on the other, so that we are not being dominated by the Government in what we are doing. It is important to bear in mind that, even in those confidential conversations, we talk to multiple Government departments, agencies and bodies and we talk to people both on the political side and on the official side. Anyone who has been in that sort of world knows that not all those people have the same preferences and views at the same time. Therefore, the idea that there is a monolithic body called “the Government” on the other side of the table, with which we must spar, rather underestimates the complexity of that relationship.
Ultimately, the transparency and the outputs are what matters. In half the forecasts that we have published—three out of six—we have told the chancellor that he would not hit all his fiscal targets on the basis of unchanged policy, so we have clearly demonstrated that we are willing to give our judgment. Equally, it is for elected politicians to decide what to do about that. Sometimes they say, “Okay, we accept the forecast and we will alter our policies to ensure that we are back on course to hit the targets.” Sometimes they say, “Okay, we accept that the forecast is that we are more likely than not to miss the target, but we will not do what is necessary because that would, we think, have counterproductive consequences for the economy.” In practice, we have demonstrated that we are willing to act on the basis of our professional judgments rather than what is convenient for the Government. That does not necessarily mean that everyone will always agree with those—they will not.
I have one last question. Given that you do not collate information on a regional basis, is it quite difficult to predict or forecast receipts for Scottish landfill tax?
Yes, at that sort of level it gets quite difficult. In some cases, it depends crucially on what data are available. It is not always necessarily clear that the data are available to produce a very good regional forecast even if that was our core task. An important issue for any new budget responsibility body that might be established would be to take a view on what new and additional data would be useful in helping us or anyone else to come up with a better informed view on such things. That is certainly an issue.
Some tax receipts are inherently more volatile and harder to estimate than others. For the taxes under the Scotland Act 2012 that we have looked at so far, we have forecast the receipts at UK-wide level and then decided what share should be attributed to Scotland. Some of that is easier to do and some of that is harder. On the income tax side, the forecasting will become a lot easier once HMRC starts flagging people as Scottish or non-Scottish taxpayers.
Thank you very much. That appears to have concluded all the questions from the committee. Are there any further points that you would like to make?
No, I think that we have covered pretty much everything.
I have just one further question. Can you tell us who the individuals are in the portraits behind you, which we have been looking at for the past hour or so?
The portrait on the right is of Lord Coventry, who became Attorney General in 1621. This entire building is filled with portraits of former Solicitors General and Attorneys General going back to the 13th century. I have just a postcard of my one predecessor.
Okay. I will not explore who the other portrait is of. On behalf of the Finance Committee, I thank you for your response to our questions today and, once again, I apologise for the technical difficulties that delayed us at the beginning of our session.
I ask the public and the official report to leave, as we will now move into private session as agreed at the beginning of the meeting.
12:07 Meeting continued in private until 12:10.Previous
Draft Budget Scrutiny 2014-15