Engagement with Office for Budget Responsibility

We will start the final part of this afternoon's meeting. I thank Mr. Robert Chote for his attendance here today and apologise for what happened last week, when it was all picture and no sound. I thank him for coming over. I draw the attention of the witness to the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. I invite Mr. Chote to make his opening comments.

Mr. Robert Chote

I thank the Chairman for the invitation. It is a great pleasure to be here. Perhaps the easiest thing to do would be to say a bit about the functions of the Office for Budget Responsibility, OBR, and how the costing role, in particular, fits in. The OBR was established in 2010. Our tasks are fourfold. Twice a year, we produce five-year-ahead forecasts for the economy and the public finances. In contrast to many other countries, the British Government no longer produces projections of its own. In some cases, independent fiscal bodies comment on the Government's numbers. In some instances, they produce parallel sets of numbers which can be compared. In the UK, the OBR produces the official numbers and it is then for Ministers to respond to those in setting out and explaining their policy decisions. We use those five-year-ahead forecasts to assess the British Government's progress against the domestic fiscal rules it has set. It is not our job to say whether those rules are sensible or whether the Government should aim to hit them at any given moment, it is our job to say whether the Government has a better than 50% chance of hitting them as they stand.

The third element, which leads directly to the issue of costings, is that we scrutinise the costing of individual measures included in budgets. We have a thing called the autumn statement, which is supposed to be different but, to all intents and purposes, is just a second bite at the same cherry and a mini-budget. The Treasury submits a list of policy measures that it is considering at the time of each of these statements. It submits costings to us so if it is a tax measure, it will be analysis done by the revenue and customs department and if it is a social security measure, it will be done by the Department for Work and Pensions. We look at that and have an iterative discussion. All of this takes place confidentially before the budget is announced. At the end of the day, we have to say publicly whether we agree or disagree with it or that the Government did not give us enough time or information to reach a considered judgment. It is important to remember that because we are producing the forecast and the forecast necessarily has to include the impact of any measures that have been announced, if we did not agree with the Treasury's estimate of what a particular thing is going to cost or raise, we would have to put our own number in to have a comprehensive forecast that stands in its own right.

Although formally speaking the process of scrutinising the costings is somewhat separate from the forecast, in fact we are producing a forecast. The Government is announcing policy measures and we must incorporate those in the package we produce.

The second round effects came up in earlier discussions and are the knock-on effects of measures on the economy and on the fiscal forecast. We tend to look at the second round effects of the package of measures as a whole. An average budget or autumn statement might have 50 to 80 measures and we would take an overall view, taking into account the fact that some are giving with one hand and some are taking with the other. There will be some measures that put inflation up and some that push it down. There might be some measures that affect the cost of capital in one direction or another. We do not provide a second round effect estimate for each and every measure. We look at that in the aggregate as part of the process.

The fourth and final thing we do is to produce long-term fiscal projections over a 50-year rather than a five-year rise, which many fiscal councils do. This brings in demographics and issues of that kind such as the evolution of a student loan system. We look at the measures of the public sector's balance sheet which allows one to bring in more elements of risk as well as the central forecast.

In the role we have been given, we are confined by legislation to analysing only the current policy of the current Government so we do not look at alternative policy measures that are put forward by Members of Parliament or by political parties. Since the OBR was created, there has been a long-running debate about whether we should take on the sort of role that the Dutch fiscal council has, which involves carrying out an explicit analysis of election manifestos and what their net effect on the public finances and the economy would be. That would be very largely a costing exercise and the decision so far has been that we should not play that role, although, for example, the chairman of the Treasury committee in the House of Commons still thinks that we should and is trying to push water up that particular hill. I think the letter that I sent to the chairman of the Treasury committee when this issue was raised has already been circulated to members of the committee. The letter dealt with some of the pros and cons and the practical issues that would be raised by that, some of which came up implicitly in the discussion the committee has just had with Professor John McHale and colleagues, for example, where ownership of these things lies or whether one is reliant on the expertise in Departments. We are a relatively small office of a maximum of only 30 people over the next few years.

In terms of the costings and some of the discussion about what we should look at, we do not look at the costing of individual measures, for example, a new aircraft carrier programme or whether we should build an exciting new railway line connecting the north and south of the UK. As a reflection of the fact that the Treasury keeps very tight control of the aggregate amount of expenditure on what one might think of as public services and capital investment, when we are doing our forecasts we reach a judgment on whether those aggregate totals are going to be overshot or undershot and by how much. This allows one to bring in some departmental intelligence, for example, it is a bad winter and the health service is having problems or the country is fighting a war and there is additional expenditure of that sort, but we do not do a bottom-up forecast regarding what we think everything the defence or transport Departments have said they are going to do will cost. There are elements of the costing function that some fiscal councils and parliamentary budget offices do which we do not even touch in our more limited scope. I will leave it there and I am happy to expand on any of it.

I thank Mr. Chote. I cannot remember the name of the new rail proposal from the north of England which caused some controversy.

Mr. Robert Chote

HS2.

What was the OBR's role in respect of the costing of this project? Did it have any role? Mr. Chote mentioned it in passing.

Mr. Robert Chote

We do not have any role in that. The Government sets out plans for departmental capital so that would be mostly departmental capital spending with some resource current spending.

Implicitly, it has set out plans through to 2019-2020, and indicative plans for a bit further ahead for the Department of Transport. If this thing has to be built it will take a chunk out of the Department of Transport's budget and some of the rest of the budget might not be so finely detailed, leaving members with the task of drawing conclusions as to what is left to spend on other things. We would not want to focus on that because, historically, the Treasury sets limits for public expenditure in those sorts of areas, sometimes moving them if it thinks it has more or less money to play with, but it tends not to break them by mistake. We take what it says about the aggregate capital budget, which would include something like HS2, and reach a judgment whether, given the near-term information, it is likely to overshoot or undershoot this year and in other years for which it has plans. We would not, however, say that we think HS2 will overrun by 50%. If we did reach that view - and this is possible given that we are fundamentally concerned about the state of the public finances - the question would be whether to borrow more or spend less on something and that, ultimately, is a political decision, not an economic one.

Deputy Doherty asked about the stand still position at budget time and the necessary expenditure to meet changes in demographics and inflation. Does Mr. Chote factor that into his annual workings on the budget and the statement?

Mr. Robert Chote

Yes. We would take the overall public services expenditure envelopes over five years and assume that, if there were to be inflation shocks over that period, the Government would have to deal with them or change policy. If inflation turns out to move other than we anticipated the most obvious area it would show up would be in our estimates of debt interest costs because those that are linked to the retail prices index can be a source of near-term forecast volatility as a result of those sorts of changes. In our long-term projections we take explicit account of things such as demographics. Our working definition of an unchanged policy over the longer term, where the Government has not stated what that policy is, would assume that expenditure on most areas of public service is constant as a share of GDP but adjusted for the representative age of the population. If the population is getting older we assume we will have to spend more as a share of GDP on those things that elderly people are more likely to consume such as health care and long-term care.

Pension payments.

Mr. Robert Chote

We forecast pension payments directly as, for public service pensions, it is a very simple top-down adjustment. We normally assume everything is constant as a share of GDP but we nudge up, or down, the bits that are age related.

Are any costings prepared as regards the outcome of the vote tomorrow?

Mr. Robert Chote

Fortunately our legislation specifies that we can only look at the current policy of the current Government which, at the time of my leaving the country, was that we should remain in the EU. Should anybody be keen to explore this issue I remind members that I am under purdah on the matter until Friday. I would therefore have to plead the fifth amendment if anybody wanted to pursue the subject.

What is the OBR's working relationship with the corresponding UK parliamentary committee and members of Parliament? Does he meet them regularly? Do they have a legal entitlement to a flow of documentation from him? Can they ring somebody in his office if they do not understand something, such as a line about health, etc.?

Mr. Robert Chote

The whole structure of the OBR, in contrast to similar bodies in other countries, reflects the fact that the executive is powerful relative to Parliament, something I suspect is true of Ireland too. In our case the Treasury is powerful relative to the rest of the executive in setting budget policy.

In a sense, we have been set up primarily to take politically-motivated wishful thinking out of the analysis the Treasury uses to publish its plans, rather than to help parliamentarians consider alternative policy options. Our relationship with members is very much focused through the Treasury Committee, the committee of the Lower House which is responsible for looking at the work of the Treasury, the Bank of England, ourselves and other economic agencies. They take oral evidence from us after each budget and autumn statement. When the Chancellor of the Exchequer stands up and announces his budget statement, we have already spoken to them about it and, as soon as he sits down, we publish a report on what our forecast for the economy and public finances would have been had the Chancellor done nothing and, then, on the impact of all the measures he has just announced. We give a pre-measures and post-measures forecast, which are published literally as he sits down. Two hours later, I hold a press conference explaining the forecasts and taking questions from anybody who has them. As that happens, the House of Commons goes straight into a debate on the budget without waiting to read anything we or anybody else has said, something which has always slightly puzzled me. Nevertheless, it is a tradition that members get straight into the fight as soon as the Chancellor has sat down. There could be scope for a more informed relationship with a wider range of parliamentarians who are interested.

The relationship at the moment is primarily mediated by the Treasury Committee, which takes evidence from us after each Budget Statement and autumn statement, typically some four or five days afterwards. They start off taking evidence from our equivalent of the ESRI and private sector economists. Then they hear from us and, within a relatively short period, from the Chancellor and Treasury officials. We get very few direct inquiries from members outside that committee but we stand ready to be helpful where we can. There is a lot of interest from Opposition spokespeople on welfare or the economy and we are happy to deal with them. We are required to lay our core publications before Parliament, which is a formal process of literally handing over hard copies to Parliament within a particular timetable so we are limited to publishing some of the big publications when Parliament is sitting.

The Treasury Committee has a veto over the appointment of myself and my two deputies. The finance Minister recommends somebody to do my job but the Treasury Committee has to approve it and the finance minister cannot sack me without the approval of the Treasury Committee. This feature is common elsewhere but it is rare in the UK for a committee to have such a formal role, rather than simply the ability to question people who have been newly appointed to jobs and to discuss their merits, etc.

The House of Lords, like the Seanad here, has a more limited constitutional role in financial issues and it is much more rare for me to be asked to speak to the Economic Affairs Committee of the House of Lords. The fact that the interest of parliamentarians is not more widespread may be due to a need to communicate better but it is also a result of the fact that, normally, the executive gets the budget it wants. Parliament occasionally amends it but often not very substantively.

I thank Mr. Chote for coming over; it is very much appreciated. As I understand the role of his office, the Chancellor of the Exchequer, in developing his or her budget, has some taxation items and some expenditure items. The Chancellor relies on the OBR to give aggregate impacts of a package of measures. Is that correct?

Mr. Robert Chote

Yes.

It is an iterative process. For example, six to ten weeks ahead of a budget we would start working on a baseline forecast of what would happen to the economy and the public finances if there were no change in policy. Simultaneously, the Government will provide us with what is known as a draft scorecard, which is a list of measures that it is thinking of announcing, most of which would be specific tax and welfare transfer measures, plus decisions on the overall size of the spending envelope for public services. As I said, it would not come to us on issues such as the purchase and cost of aircraft carriers.

As the budget gets closer we go through successive iterations in finalising our pre-measures forecast. We also go through a process of examination of the list of measures provided by the Treasury. Typically, a lot of the measures provided eight weeks out will have dropped off the list as we get closer to the budget - in part, perhaps, because during the course of our discussions on a measure and the likely cost the Treasury may take the view that it is not something it would be happy with. The Treasury has never yet publicly pressed ahead with publishing a costing estimate that it knows we did not support. It is more likely that it would drop a measure rather than do that. Some measures will come on relatively late in the process, such that there is a nail-biting period in terms of the loss or gain of particular measures from or to the list. We set clear deadlines by which the Treasury needs to inform us of a measure that is substantive enough to affect the economic forecast and another deadline in respect of other new measures. We also allow a little wriggle room in relation to measures it has already told us about. For example, it may want to change a tax rate from, say, 11% to 12% or something like that, which involves no great analytical content.

The final process is a pre-measures forecast. We can then say what the post-measures forecasts would look like once all of this has been taken into account. At the end of the day, the Treasury can choose what forecast it wants us to publish for the public finances, or it can choose the policies, but it cannot choose both simultaneously unless we think the two are consistent. There is a choice to be made. We do not get up on budget day and surprise the Treasury. We will have had this discussion beforehand and will have set out our view of what particular measures will cost or raise. We then reach an aggregate view on whether a package is a net giveaway and is therefore likely to result in a boost to the economy and to activity in the short term, or whether it is something that is likely to push measured inflation higher or lower. As I said, this is done at an aggregate level rather than measure by measure.

So when it comes to big-ticket items such as the commissioning by the Treasury of an aircraft carrier that will cost €2 billion per annum over five years, the OBR does not cost that but it does include that €2 billion in its assessments.

Mr. Robert Chote

Only implicitly, because the Treasury will have given us a departmental expenditure limit, DEL, which is aggregated over all Departments. There is one DEL for capital spending and another for current spending. It will tell us its aggregate capital and resource DELs, which are then used in the forecast. The only adjustment we make is an aggregate over- or underspend against that DEL, which we would base on recent history, intelligence from the Treasury, intelligence from Departments and knowledge. For example, we might know that there has been unexpected military action and that therefore some of the contingency reserve has been already spent, and that information would be taken into account. What we do not do is produce a bottom-up forecast that shows that total spending equals aircraft carriers plus high-speed train plus nurses plus so on and so on. It could be done that way, but that is a reflection of the fact that the Treasury carries a big stick. There are strong incentives for the Treasury and Departments in aggregate not to overspend, and they do not.

Am I correct that if the Department of Health informs the OBR that the NHS spend will be approximately €130 billion, rather than working out the number of doctors, nurses, hospitals, drugs and so on, the office may take the view that because the socio-demographics are moving in the opposite direction, it does not accept that NHS spending will decrease by 4% and therefore it does not accept the figure of €130 billion?

Mr. Robert Chote

We could do, but the argument would be that it is for the Government to decide what quality and quantity of public services it wants to deliver, which has been a very pertinent issue over the last few years. The Office of Budgetary Responsibility, OBR, was established at a time when the Government was starting a substantial fiscal consolidation programme, although not quite as substantial as the Irish programme. It was clear that the fiscal consolidation programme was premised on spending plans which would not maintain the quality and quantity of public services but it was Government policy to achieve that level of spending. We could in principle have said that we did not believe that it was politically and economically feasible for Government to deliver that share of GDP to be spent on public services spending but we did not do that. Frankly, had we chosen to do so, it would have been hard to come up with a firm analytical basis for it. What we would have been saying is that the Government has made a decision to pencil in a set of overall spending plans that most people are likely to conclude would not imply maintaining a given quantity and quality of public services but we are in a fiscal consolidation and that is what the Government has chosen to do. Historically there is no reason to believe that if that is what Government says it is going to do, and it tries to do it, it will not achieve it. It is not for us to look at value for money or the outputs obtained from the inputs.

I have two more questions. The OBR provides the service for the Chancellor of the Exchequer. What mechanism is available to Opposition MPs or Opposition parties to have their budget or policy proposals costed and assessed?

Mr. Robert Chote

In some cases, they could ask parliamentary questions. For example, if they proposed to introduce a measure which proposed to raise income tax rate X to Y they could table a parliamentary question or an inquiry to the House of Commons Library. One often finds that some of the costing elements of manifesto packages are basically what MPs or parties have been told in response to parliamentary questions. Another route is the Institute for Fiscal Studies, which organisation I ran prior to taking up my role at the OBR. Obviously, the institute does not have all of the data and information that would be available within Government but in some cases it can come up with reasonably good estimates and in others it has to throw up its hands and admit it does not have the evidence to respond. There is no formal process for the sign-off of Opposition policy platforms. The Dutch are the most dramatic in this regard in terms of their having had 2,500 policy proposals from nine parties costed in the run up to its last election. It took 80 people three months, full-time, to do that work. It is an enormous exercise. For the Australians, which costed fewer proposals, it was a slightly lesser exercise.

I echo the point made earlier by Professor McHale that the idea of throwing inadequate resources to the job people are being asked to do is a recipe for destroying the credibility of the organisation almost before it is started. Alignment of the budget and the job is crucially important.

The role of this committee is to recommend a structure rather than to engage in the actual process. Based on what Mr. Chote has seen, international comparators and so on what does he believe the committee should definitely include in its report, what mistakes should we avoid and so on?

Mr. Robert Chote

There is no one size fits all answer to that question. It is important to tailor the structure to the particular parliamentary systems and domestic institutions. A very clear lesson is that any new organisation or restructured organisation must have a well defined remit rather than one that can be called into question or becomes a political issue if it chooses to do something or not. It is important it is set a clear task and that it is resourced adequately to do that task.

If one says that a body is to do X, Y and Z but only funds it to do X, it wrecks the credibility of the body. One of the key things we have tried to emphasise is the need to recognise and be upfront about the uncertainty in respect of forecasting and costings. We have an explicit process in regard to every costing on which we sign off and in incorporating it into our forecasts we give it an uncertainty ranking, an idea I stole from the Australians. This is based on the quality of the underpinning data and on how complicated the modelling and the process of calculating the answer are. We ask if it is a measure that will result in big and unpredictable changes in people's behaviour. Only a madman sets fiscal policy on the basis that a set of medium-term fiscal forecasts and the costings they involve will be correct in every respect. One of the biggest services these bodies can provide is to ensure that it is front and centre from the point of view of the public and that the people making the decisions recognise that as much as anybody else.

I thank Mr. Chote for his attendance and for giving us his thoughts. We had a discussion in his absence last week when we went through some of the documents he circulated to us. These will certainly form part of our discussions. We will start considering, on a line-by-line basis, what our report and recommendations will be in our meeting at 4 p.m. on Tuesday next week.

I also thank Mr. Beausang, Ms Swaine and Mr. Palmer for their attendance.

The select committee adjourned at 1.10 p.m. sine die.