Official Report: Minutes of Evidence
Committee for Finance, meeting on Wednesday, 9 June 2021
Members present for all or part of the proceedings:Dr Steve Aiken OBE (Chairperson)
Mr Paul Frew (Deputy Chairperson)
Mr Jim Allister KC
Mr Pat Catney
Mr Maolíosa McHugh
Mr Matthew O'Toole
Mr Jim Wells
Witnesses:Mr Richard Hughes, Office for Budget Responsibility
A Fiscal Council for Northern Ireland: Office for Budget Responsibility
The Chairperson (Dr Aiken): Joining us, via StarLeaf, is Richard Hughes, the chairperson of the Office for Budget Responsibility (OBR). Richard, thank you very much indeed for taking the time to talk to us. Unfortunately, due to COVID, many of our members are available via StarLeaf or are not present because of a late plenary sitting in the Chamber last night. We do not have the full cohort of members, but I can assure you that we are particularly interested in listening to your evidence.
The main issue for us is that we are setting up an independent fiscal council and an independent fiscal commission, and we are seeking to get as much evidence as possible on the best framework for setting those up. We have received quite a lot of evidence from Scotland, Wales, the Republic of Ireland and the OECD, and I can speak for most of the Committee when I say that we are very much minded that Northern Ireland desperately needs this. We are just not quite sure how we want to do it. The organisation that keeps coming up time and again is the OBR. That is why we look forward to listening to you.
Team, relevant papers are in your packs. Richard, can I ask you to make your opening statement? We can then get stuck in.
Mr Richard Hughes (Office for Budget Responsibility): Great. Mr Chairman, thanks very much for the opportunity to appear before the Committee. Let me say that I really welcome the establishment of the Northern Ireland fiscal council and the Committee's interests in its mandates and activities. Let me also say that I do not think that you could have made a better choice as the chair of the Northern Irish fiscal council than Robert Chote, whose leadership and vision over the last 10 years has really made the OBR what the OECD described, in its independent review, as a model for independent fiscal institutions around the world. I should emphasise that Robert had a full decade at the helm of the OBR as the chairman. I am still in my first year, and I should advise you that, if any of my testimony directly contradicts his, you should weight our views according to our experience. His experience is much more prodigious than mine.
Given the OBR's dual mandate of providing both the executive branch in the UK with its official economic and fiscal forecast and informing Parliament and the public's consideration of fiscal matters, its relationship with the Treasury Committee in Westminster and the Finance Committees of the devolved Administrations has always been vital to the effective fulfilment of its functions. In Westminster, the Treasury Committee in Parliament is not only one of the most important customers for our analysis but it has been an important guarantor of our independence from the executive branch. Indeed, the Chair of the Committee typically starts each of his sessions on the OBR's forecasts by asking whether the Government have sought to exert any pressure on the OBR to change its forecasts or revise any of its judgements. For the past 10 years, the answer has always been no. That is an example of how important it is that the legislature takes an interest in the operation of the fiscal council, even after its establishment, and assures that its mandate is respected and its independence upheld.
I am really encouraged that the Committee is taking such a strong interest in the legal institutional arrangements for the establishment of the Northern Ireland fiscal council. During questions, we can come on to the mechanisms that have been most important in ensuring our independence and the impact on fiscal policy in the UK. However, before we do that, I thought that I might offer a few reflections based on my relatively brief tenure as chair of the OBR since October about the role that it plays in the fiscal policymaking process in different parts of the UK.
When thinking about what the OBR has contributed to the fiscal debate and fiscal policymaking process around the country over the past 10 years, I highlight four things. First, it has brought a more accurate and realistic economic and fiscal forecast to underpin the Government's Budget decisions. I should stress that, especially in the context of the past year, no economic institution has been particularly good at spotting crises, shocks or turning points in economic activity of the sort that the coronavirus pandemic has been. That remains an ongoing challenge for institutions such as the OBR and economic forecasters around the world, who are essentially trying to predict the future but are not always good at seeing things that can blow those predictions dramatically off course, such as the pandemic, the 2008 financial crisis and things that came previously.
A second contribution that the OBR has made and that is really not to be underestimated is its contribution to greater transparency about the assumptions that underpin the Government's economic and fiscal plans. That is not only transparency about the economic assumptions that go into the forecast but greater transparency about the detail that underpins the fiscal forecasts. That is an important consideration in Northern Ireland, where some of the concerns that people have expressed about fiscal policymaking up until now have been about the opacity of the Government's budgetary plans and the need to shine more of a light on what goes into them.
A third contribution that the OBR has made has been to make the Government more accountable for issues of sustainability and risk — those things that are beyond the typical Budget-planning horizon and that are off the edges of a typical Budget forecast. What are the potential threats and shocks that might blow the Government's fiscal plans off course in the medium term, and what are the looming long-term threats to sustainability that are lingering just beyond the Budget horizon? Those are things like demographic and climate change, which are slow burns that affect public finances over long periods.
Fourthly, and not to understate it, the OBR, together with our sister institution in Scotland and the work that we have done with the Welsh Office, has aided the process of fiscal coordination across the United Kingdom and with the devolved nations. At the very least, we have helped to inform discussions between Westminster and the other Governments that make up the UK about fiscal decision-making and provided a better information base for that process. We very much welcome the establishment of the Northern Ireland fiscal council as a counterpart in that work. I look forward to working with it to help to provide even greater transparency about the linkages between the Westminster Government and the Government in Stormont.
I want to consider the key to our success. It was very nice to read the OECD report, but I do not take any credit at all for what it says. It was nice to hear that we are considered to be a model fiscal institution in the world. What has contributed to that success in the OBR? First, there is a strong but simple legal framework that safeguards our independence. I am happy to come on to what that means in practice when you think about your own founding legislation.
Secondly, there is a clear but fairly limited mandate. By "limited", I mean that the important thing about our role is that it is limited to the conduct of analysis and not to the provision of policy advice to government, which would threaten to drag us into the policy debate and potentially undermine our important independent role as analysts who inform that debate.
A third thing, which we are given in legislation, is broad discretion about how we fulfil that mandate. We are not prescribed to produce beyond a handful of documents over a year, including two forecasts to support the Budget, or any particular kind of information and, indeed, we are not limited to providing just that information. We are allowed to fulfil our mandate to inform the public debate about fiscal sustainability in any manner that we choose, and we can look into any issues that we think are relevant.
Related to that is the fourth key to our success: the right to access information that enables us to meet that mandate. We have a legal right to get information out of the executive branch. We do not have to ask the Treasury's permission. We do not even need to ask a Minister's permission. Officials are obliged to provide that information as a matter of law.
Fifthly, we are given sufficient resources to deliver our mandate. We are headed towards being an institution of around 40 people. That is enough to deliver the limited mandate that we have. We have nothing like the hundreds of economists that the Congressional Budget Office (CBO) in the US has, or the larger number of economists that the Dutch Central Planning Bureau has. The CBO has a much broader mandate than we have, and a much closer relationship, I could say, with the legislative process within Congress in the US in that it serves individual congressmen in the drafting of Bills.
Sixthly and finally — again, I do not understate it — we have strong support from the Treasury Committee in Parliament and in the wider economic community in the work that we do. They are important clients for us. They tell us what they want to see in our reports. As I mentioned, they are important guardians of our independence from the executive, which helps to ensure that those reports are independent and hard-hitting.
Let me conclude by also offering some thoughts on issues that have proven to be more challenging, albeit with the caveat that the last nine months, which were my first nine months in the job, have been a really challenging time for everybody. Some of those challenges reflect the fact that we are operating in a very difficult environment in economic policymaking and decision-making at every level and in every part of government.
Budget timetables have been one challenge. They have proven to be a headache for everyone, not just in Westminster but in Stormont, Edinburgh and other places. That has been especially true over the past year, when we have seen more than a dozen Budget-sized fiscal announcements of which, as an institution, we needed to keep track. Many of those announcements were made, out of necessity, outside of and without an updated economic and fiscal forecast. The Chancellor has had to make decisions on the hoof. The same has been true of the Finance Ministers in the devolved Administrations. It creates complexities and difficulties not just for us but for the Scottish Fiscal Commission in trying to keep pace with events, align forecasts that are produced at different times and trying to capture all the decisions that have been made at different levels of government and also their interdependencies. Of course, the resources that you have to deploy in Stormont and that your colleagues have to deploy in Edinburgh depend on decisions that are made in Westminster.
A second challenge that we found is trying to find ways of communicating risk and uncertainty and avoiding an excessive focus on just our central forecasts. The past year has taught us that forecasts are only as good as the day on which they are produced. After that, events take over. Two once-in-a-lifetime shocks have hit the UK economy in the space of the past two decades, neither of which was anticipated by the forecasts that were produced even a few months before. In the work that we do, we have tried to emphasise just how much uncertainty there is in the fiscal outlook. In that, we provided different scenarios for the path of the pandemic, including options where vaccines worked and did not work, to try to help policymakers to appreciate how to prepare for the full range of potential scenarios for the pandemic. I think that we made some progress with that, including through publications like the fiscal risks and fiscal sustainability reports, which focus on the wider realm of possibilities that might unfold in the coming years. However, there can still be a preoccupation with our precise point estimate for GDP this year, next year and the year after that.
A third challenge has been that some elements of the public finances remain more opaque than others. Here, I would emphasise the departmental expenditure limits (DEL) that make up roughly half of total public spending and on which the Northern Ireland block grant is based. We essentially forecast those, almost as a lump sum, based on discussions with the Treasury about how much DEL it has planned over the coming year and how much DEL it expects to execute within those plans in the coming year. The fact that, at least for the last year, the Government have been effectively operating with just an annual Budget and not a multi-year horizon for departmental expenditure limits means that our forecast for DEL is much more indicative beyond the year ahead than things like our forecast for welfare spending, where you can predict case numbers and uprating; Governments have stated policies in those areas, and you can forecast them on a more technical basis. Essentially, DEL is a political commitment of the Government that we take into account in our forecasts with a bit of discounting. It is not a technical exercise for the likes of us, but we need to improve on that.
The fourth and final challenge is that Westminster has been operating without any clear fiscal rules for government. The fiscal targets that are set out in legislation expired in March and were broken by very large margins as a result of the fiscal shock of the pandemic. Since then, the Chancellor has outlined a set of objectives for fiscal policy that he has committed to codifying in legislation at some point this year. However, for the moment, they are vague in precise values and deadlines. That means that it is difficult for us to fulfil the part of our mandate of whether the Chancellor is meeting those objectives.
None of the issues that I raised is easy to solve and none of them can be resolved by ourselves alone, but I think that, working collectively across countries and between Governments, fiscal councils and legislatures, we can make progress on all of them. They are by no means the full list of things on which we need to make progress collectively as a fiscal community, and I look forward to hearing your thoughts on the role that the Northern Ireland fiscal council can play in helping to improve that situation. I would be really happy to take any questions that you might have.
The Chairperson (Dr Aiken): Richard, thank you very much indeed. I will get stuck straight in. We have had our challenges with our budgeting process this year, but we have always had challenges. To put it politely, we have always had some sort of crisis or something issuing with the Budgets or the presentation of information as we have gone through them. Some of it is down to delays and disputes with Westminster, but, very often, it is due to our internal issues.
The Welsh Government appear to have developed a memorandum of understanding (MOU) with the OBR that allows for a draft Budget that is based on your projections. We do not have devolved taxes, but your projections could be devolved and debated, regardless of delays at Westminster. Do you think that we could have something like that in Northern Ireland? Even if we had a baseline against which we were able to plan and were looking at information from an independent fiscal council, it would at least let us know how much we are off the delta and level of deviation and give us a framework from which to start. What are your thoughts on that?
Mr Hughes: It can help, although I stress that we do two economic forecasts a year, and those are done to support the Budget process in Westminster. They do not necessarily coincide with the timetables and needs of the Governments in the devolved Administrations. One thing that we are not able to do, basically for resourcing reasons, is bespoke forecasts for devolved nations outwith the forecast that we do for the UK as a whole, because, essentially, those forecasts piggyback on the economic forecasts that we do for the UK as a whole.
It has been the case in Scotland that the Scottish Fiscal Commission, which is a relatively well-resourced fiscal council for a devolved Administration — obviously, the Welsh do not have their own fiscal council — does its own economic forecasts for Scotland, forecasts its own tax revenues and welfare, and compares it against ours. That is, of course, better suited to the timetables that they have. We have had instances, even in the past 12 months, when the Scots produced a forecast before us because they had to fulfil their own timetabling needs.
Therefore, it can be part of the solution, and, I think, in general, forecasts need to be regularly updated in the context of crises. Our ability to provide a bespoke forecast for Northern Ireland precisely to fit your needs might be more of a challenge. It raises the question of what the role of the fiscal council would be in Northern Ireland and whether it would have its own forecasting capacity and mandate or would piggyback on ours. If it were to piggyback on ours, unfortunately, it would basically have to accept the vintage of when that is produced. If your process happens at a different stage than ours, there is a risk that, if events move on, it becomes out of date.
The Chairperson (Dr Aiken): I have a quick question. You said that the Scots produced something ahead of the OBR this time round. When they did that, how far away was it from the model that you were looking at?
Mr Hughes: It was different, but, basically, that was mostly because of the timing. It was produced a few months after we had done our most recent forecasts. What we understood about the progress of the pandemic had changed. At the time that Scotland did it, vaccines had been developed, and that was good news relative to an earlier forecast that we had done. However, the even better news about both the effectiveness of the vaccines and how quickly it looked as though we would be able to roll them out and lift restrictions meant that our subsequent forecast was even better.
Therefore, it is not so much that there were differences of methodology, but timing has been everything in the past 12 months in understanding the impact of the pandemic and public health restrictions on the economy and then forecasting what the lifting of those restrictions would mean for the recovery in activity as we come out of the pandemic.
Mr Allister: Good afternoon. I want to cover a couple of areas with you. The OBR already gets information from Northern Ireland. I want to explore what happens to that information. It receives Northern Ireland data, both from the Treasury in the run-up to each Budget and autumn statement and directly from Northern Ireland during the twice-yearly annually managed expenditure (AME) exercises. What does the OBR do with that information?
Mr Hughes: We use it to update out-turn against our forecasts for departmental spending and welfare spending, and then it becomes the input into our own forecasts for departmental spending and welfare. Given that Northern Ireland is a relatively small part of both those areas, it does not form a big part of that forecast, but, nonetheless, for adjusting for out-turn and looking at the forecast for the coming year's AME, Northern Ireland is a separate item within departmental expenditure limits, and welfare spending in Northern Ireland feeds into the welfare forecasts that we provide to the Government.
Mr Allister: Am I correct to say that there is no memorandum of understanding to cover any of that? Is that right?
Mr Hughes: There is not, mainly because we do not have a direct relationship with you of the kind that we have with the Welsh Government, whereby we provide forecast inputs into the Welsh Government's Budget process. We rely on the memorandum of understanding that we have with the Treasury, on behalf of the UK Government, to get the information from it that we need concerning spending in Northern Ireland.
Mr Allister: Given that Northern Ireland's budgetary arrangements are very much focused on the Northern Ireland grant, and we are not in a situation of balancing income with expenditure, what use is there for a fiscal council? What will be the added value of a fiscal council in that limited situation?
Mr Hughes: The implication in your question is right. One of the functions of fiscal councils across the world is to provide a macroeconomic forecast on which Governments can base their economic and fiscal plans. Since Northern Ireland does not have its own revenues, and because its revenues depend on the revenues and spending decisions of the UK Government, it does not make a lot of sense at this stage in the process to have a fiscal council producing a macroeconomic forecast for Northern Ireland. It may be interesting to business in Northern Ireland, and it may be interesting for other reasons, but it is not essential to producing the Budget, because the Budget depends on the block grant that you get from the UK.
We play an important role beyond the forecasting role. We provide greater transparency on the composition of spending, the challenges and pressures on spending over the medium to long term and the sustainability of the Government's fiscal plans. A fiscal council in Northern Ireland could fulfil that role. It is the scrutiny of public finances function, which looks at their composition and evolution and makes sure that they are based on a credible and realistic set of assumptions that match the pressures that are being put on different parts of the Civil Service.
Mr Allister: Speaking of such scrutiny, Northern Ireland has an astonishing level of spend on welfare — over £5 billion a year. In the scale of the total spending, that is truly shocking. Would there be a role for the fiscal council in looking into that and, in particular, the robustness of any anti-fraud measures and how they are operating? Would that be a useful function?
Mr Hughes: We provide that function for the UK Government. The Office for Budget Responsibility produces a welfare trends report. It looks at the long-run trends in welfare spending over time and the pressures on welfare spending over the medium term. That helps to frame the debate about why the Government spend large amounts on welfare in some areas and perhaps less in others. We are also a check on the realism of the Government's plans to change welfare policy. For many years, the OBR scrutinised the plans for the roll-out of universal credit (UC) and asked tough questions about whether the timetable for the roll-out, which was aggressive, was realistic and whether the anticipated savings would materialise. Over a series of forecasts and tough discussions between the OBR and the Treasury, we got to a much slower and more realistic forecast for the roll-out of UC and, therefore, fewer savings coming out of the process. There are roles in understanding the underlying trends in what is happening to the overall mass of welfare and in providing greater scrutiny about the Government's plans for reforming welfare, if and when they materialise.
Mr O'Toole: Thank you, Richard, for your evidence. What are your overall perceptions of the Budget-making process of the Northern Ireland Executive and, by extension, the Assembly and how it is scrutinised?
Mr Hughes: I am relatively new to the role here, and I have not been directly involved in the Budget-making process in Northern Ireland or your scrutiny. I am an active consumer of the information that is produced as part of the process, but the documentation is relatively limited.
It provides a breakdown of spending by Departments, some breakdowns of spending on welfare and the split between current and capital spending. If you compare that with the amount of information that we provide about the UK Government's Budget, it is relatively limited.
A lot of the questions that need to be asked about budgets are about the assumptions underpinning the numbers, not what the numbers themselves are. The numbers are the things that parliamentarians need to vote on as a matter of law, but what matters for whether they are credible and sustainable are the assumptions that you are making about their growth or reduction and the scrutiny of what assumptions are being made about the impact on different policies. Are heroic assumptions being made about how much you can save in a particular area? Are heroic assumptions being made about how slowly some items of spend will grow and how quickly some items of spend on tax will rise? The underpinning assumptions are less apparent from the documentation that the Government produce.
The other thing that I note is that, basically, you get one year, and, for the purposes of fiscal policy, you are along for the ride for the year ahead. The things that you can change are the arc of spending and the arc of tax over a five-year period. Just think about this Government's current tax-raising plans. Most of the rises in tax will come in in 2025, and, in that sense, near-term decision-making is pretty constrained. It is medium-term decision-making, which gives you more options and more choice.
Mr O'Toole: That is really useful. You hit on the question of medium- and long-term policymaking and Budget setting. As you said, obviously, it is dependent on the block grant. In recent years, our Budgets have tended to be for one year.
On the subject of a macroeconomic forecast and whether it is useful or sensible for the fiscal council here to produce its own macroeconomic forecast as part of its work, if we have a multi-year Budget — hopefully, we will have one after this year's spending review — would it not be useful, sensible or helpful to have a discrete macroeconomic forecast on which to base longer-term policies and with which to explain to the public how and why those policies are being made?
Mr Hughes: I can see there being an input into the making of welfare policy, because it tells you things like how many unemployed people you will have and how many claimants to the welfare system you are likely to have. To some extent, however, those numbers can be generated from our own forecasts by making a few assumptions in the way in which we provide the same information to the Welsh Government for their welfare planning. Given that you do not have many of your own revenues, that is one very big reason not to produce macroeconomic forecasts just for the sake of Northern Ireland.
On your question about how you make decisions about the rest of spending — not welfare spending but spending on public services — in every country, there is a lively debate about the feedback between government policy on the one hand and the economy on the other. Governments often want to believe that, if they spend lots of money on infrastructure, for example, and lots of money on education, they can get big growth effects later in the forecast from the impact of those things.
The reality is that those kinds of changes operate on economies over a period of decades. If you start educating more children now, or if you educate them better now, they will not be in the workforce for 10 to 15 years. Those sorts of interventions do not really show up in economic forecasts for very long periods, if at all. The same is true of investments in infrastructure. It takes five years to build much of the infrastructure, so, apart from the demand side benefit, you do not really see much of the supply side benefit for decades, if not generations. If what you were looking for was, "What is the return on this transport investment project? Why can I not see it in the forecast?", the answer is that it is somewhere way out in the distance. It is probably quite small and getting lost in the forecast-to-forecast changes when you take into account out-turn or smaller changes to inflation or infrastructure.
Mr O'Toole: That is really useful. Part of the OBR's job is giving the public and Parliament an independent watchdog or a check on government policymaking. Clearly, the OBR has done that very well, and, in a sense, externally, the Institute for Fiscal Studies (IFS) has done some of that as well. There is also the explanatory job of education that you talked about. This is a statement, and I am not asking you to endorse it: the policymaking landscape in Northern Ireland has been relatively unambitious, perhaps, and very short term. There is quite a large consensus that policymaking and Budget setting have been short term here. Is there a job of education that would be served by the fiscal council having macroeconomic forecasting power? Even if, as you say, the short-term benefit of trying to forecast the multiplier effect of a one-year economic policy, such as the high street voucher scheme that we are doing this year, is limited and economically dubious, is there a different argument to do with the necessary job of educating the public and explaining longer-term policy options, such as investment in infrastructure or some kind of skills policy? My question is this: is there a different argument to do with public education?
Mr Hughes: I think that there is. Potentially, that requires a different kind of capacity from the fiscal council, or, at least, a different function. It is not providing any regularly updated forecasts of the medium term; rather, it is providing projections for the long term. It is more akin to the long-term fiscal sustainability analysis that we provide once every two years to the Government and to Parliament in the UK than the forecasts that we do every six months. Those kinds of exercises are less disaggregated, less complicated and require fewer people. There is a great benefit to them, though we do not do them every year, so we are not constantly updating a really complicated machine. However, they help to inform discussions about things like demographic changes and pressures on welfare systems, the impact of things like climate change and questions about what would make a difference to long-term productivity.
Mr O'Toole: Those reports, then, are as much about the text as the tables, in that they are as much about framing the narrative and offering insight as they are about saying, "Look at this table. Write this headline on the basis of this number".
Mr Hughes: They are. Text and tables go best together, and I will give you one example. Quite early in our fiscal sustainability analysis, a particular insight into long-term health costs was revealed. Often, people talk about those things as being demographic, whereas, in reality, the main problem with health pressures is not so much the population ageing but unit costs going up over time. In our projections, population ageing accounts for about a quarter of the total rise in health spending. It is the escalating unit costs per old person that are driving much of the rise in health spending over the forecast horizon. That leads to a different discussion about long-term health policies, because it becomes more about how to get better efficiency and how to control costs, rather than necessarily asking questions about what to do about the fertility of the population or whether there are enough people working to support old people.
Mr O'Toole: OK. I will try to close now, Chair, to give others a chance to come in. I have a question on the 'Charter for Budget Responsibility', which is legally required. However, it does not have a very clear fiscal mandate at the minute; it has an inoperative fiscal mandate. Rather than asking about what the UK and the Treasury are doing, what kind of fiscal mandate do you think would be useful for a devolved Executive?
Mr Hughes: I am certain that the prohibition of my commenting on policy extends to commenting on policy in Northern Ireland, so I would not dare to suggest to you what your fiscal rules should be. One thing that it is evident from the information that you have available to make fiscal rules is that the kind of fiscal rules that you have for the UK as a whole, which depend on knowing what GDP is and being able to measure things such as output gaps — the gap between supply and demand, and whether you have a structural deficit or just a cyclical deficit — are much more complicated to calculate for a devolved country than for a national Government. Basically, the information to provide those calculations does not exist. It is for that reason that, traditionally, some national Governments have had fiscal rules that are simpler and easier to calculate.
The other thing that you tend to need at a subnational level, potentially less so at a national level, is flexibility. Subnational finances can be a lot more volatile if you do not have the stabilising element that comes from the centre of government, such as redistribution or equalisation funds. We have some of those in the UK. However, we do not have as many as are seen in true fiscal federations elsewhere in the world, which have big stabilisation funds or much greater borrowing powers for subnational Governments to balance local revenues against local spending. The fact that they are smaller, local economies means that they are much more volatile than the national economies that can average out areas that are booming versus areas that are struggling economically.
Mr O'Toole: You may be aware that, in addition to a fiscal council, we have a fiscal commission, which is chaired by another luminary, Paul Johnson.
If you could change and try to improve one thing about the OBR's relationship with the Welsh Government, what would it be?
Mr Hughes: It is a work in progress. I think that it works remarkably well. One thing that would be of benefit to all of us, especially once the Northern Ireland fiscal council is set up, is to have more regular, frequent discussions with our colleagues in Wales, Northern Ireland and Scotland about the state of the macroeconomy: where we think that it is going and how it is showing up in respective Budgets, including questions on what is happening to the labour market situation in particular at the moment. Once the Northern Ireland fiscal council is set up, there will be an opportunity for us to have a quadrilateral group that meets regularly to talk about surveillance issues and those coordination and management issues.
Mr McHugh: Richard, fáilte romhat. You are very welcome. You mentioned independence being central in many respects. Are you free to publish at your own discretion or do you find that you are directed by the Government or otherwise?
Mr Hughes: No, we are free to publish at our own discretion. The only constraint that we have from the Government is that, because we provide the economic and fiscal forecasts to support the Government's Budget, we coordinate with the Treasury to make sure that our economic and fiscal outlook coincides with the publication of the Budget. Beyond that, we decide the timetable for publication of our documents. All the content of our documents, all of our analysis and all the judgements that we make in putting it together are
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Mr McHugh: Richard, in relation to your governance structures, who has the final say on appointments to your body?
Mr Hughes: That is an important issue, and it relates to how to safeguard independence. My appointment, and those of the budget responsibility committee, my two colleagues, are unique in the sense that it is the Chancellor who proposes the candidates, but they have to be confirmed by Parliament's Treasury Select Committee.
That is a very American-style arrangement: the legislature has confirmation hearings for officials appointed by the Executive, and the legislature's explicit approbation is required for the person to get the job. It is not true even for the governor of the Bank of England.
Reflecting our dual mandate to the executive and to the legislature, there is, essentially, a dual key between the Chancellor and Parliament's Treasury Select Committee over the three key appointments to the OBR. That has been an important guarantor of our independence, because it makes sure that I am not just a creature of the Treasury. It was especially important in my case because I had spent a fair amount of time working in the Treasury. It was for me to prove, demonstrate and reassure Parliament that I was not going to be just the Chancellor's man sitting here in the OBR.
Mr McHugh: Does the legislation specify what kind of qualification staff require to take up post? How many of your staff are, say, economists by trade? How many come from government or public expenditure backgrounds?
Mr Hughes: The legislation does not specify any particular qualification. It says that we have to be qualified to do the job. The Chancellor and Parliament need to be satisfied that we have the background and experience to do the job well, but the legislation does not specify that we necessarily have to have a master's degree, PhD or those sorts of things. I have a master's degree but not a doctorate.
On the question of the right people to employ, we are in large part an economic and fiscal forecasting outfit, so an economic background is important. I should emphasise, though, that some people come from generalist backgrounds and learn skills on the job. It is important to have a balance of people who are macroeconomists by training and others who have more public finance experience. Of the three members of the budget responsibility committee, Charlie Bean is an eminent macroeconomist with lots of experience, whereas Andy King and I have more of a public finance background than a pure macroeconomics background. Having a mix of skills at the top of, and throughout, the organisation is important so that we do not become too much of an economic think tank but have people who have practical experience of managing tax revenue collection, public expenditure planning and budget policy.
Mr McHugh: Which aspects of the legislation that established the OBR are most important to allow you to fulfil its functions? Which of them might be appropriate for the fiscal council for the North of Ireland to copy?
Mr Hughes: There are three things. The issues that you raised about the appointment process and ensuring dual accountability to the executive and Parliament are critical to our independence. The second thing is specifying, but only at a very high level, what outputs we are expected to produce. The legislation says that we have to produce two economic and fiscal forecasts for the Government and a handful of other supporting documents once a year or once every two years, but it leaves us broad discretion to decide all the content of those documents, consistent with meeting our mandate. The third thing, which is really important, is the right of access to information from the Government to produce those documents. That has allowed us to inform decision-making and debate in a way that I did not think possible before the OBR was created. Basically, we have become a conduit for getting information out of the Government and putting it in front of you, Parliament and the public, which allows what the Government are doing with public finances to be scrutinised in more detail.
Mr McHugh: Yes, and you have stated that you have a legal right to access that information.
Mr McHugh: Go raibh míle maith agat arís. Thanks very much once again, Richard. Go raibh maith agat. Thank you.
Mr Wells: We were here until 2.30 am dealing with alcohol and liquor licensing. I feel as though I spent until 2.30 am drinking intoxicating liquor
but I did not. Most of us are a wee bit under the weather after that experience, but we were able to grasp most of what you said, and other members have covered a huge degree of that. I am trying to tease out what the relationship is between you and your counterparts in Scotland and Wales and what the relationship is likely to be with us. You said that you have a memorandum of understanding with the Welsh office of budget responsibility or fiscal council. What is your relationship with Scotland?
Mr Hughes: Each of our relationships is different. My guess is that we will have a different relationship with the council in Northern Ireland. I do not consider any of those to be a copy-and-paste model that you could use for the institution in Stormont. Scotland has the Scottish Fiscal Commission, which is, basically, a Scottish OBR, so our relationship is one of mutual support. It does its own economic forecasts and fiscal forecasts for devolved taxes and welfare. Essentially, we compare notes, help each other, share our respective views on the outlook and make sure that our key assumptions correspond to what they are planning in Scotland and what we are planning in the UK.
It is different with Wales because it does not have an independent fiscal watchdog. Our memorandum of understanding is with the Welsh Government, and it is to provide the economic and fiscal forecasts that underpin the outlook for Welsh taxes and spending. Northern Ireland will have its own fiscal council, so we will have to have yet another kind of relationship with it. As mentioned at the beginning, the case for having an independent macroeconomic forecasting function in Northern Ireland, at least at the beginning, before taxes are devolved, is weaker than it is in Scotland or even Wales, where taxes are devolved. There is definitely a role of coordination and discussion around the assumptions that go into producing the fiscal forecasts for Northern Ireland, particularly for welfare spending. That will be important. We could also compare notes on forecasts for the wider public finances and anything that has particular sensitivities to the macroeconomy.
Mr Wells: Do you not see a role for a formal link between Northern Ireland and England, or the UK, in that sense?
Mr Hughes: I think that, once the institution is established, we will look to have a similar kind of memorandum of understanding with the Northern Ireland fiscal council in areas in which our responsibilities overlap. Those things tend to codify what both sides agree is a good working relationship and how we sustain it. In Scotland — my guess is that this will also the case with you — mandates evolve over time, so you have to keep those memoranda up to date. For example, if the fiscal council in Northern Ireland decides to do some long-term projections, we will have to think about how to support that process here in the OBR by adapting our long-term forecasts, going out to 30 or 50 years, to make sure that they are of use and can be input to any kind of exercise that you want to do in Northern Ireland.
Mr Wells: My next question might be a wee bit out of left field, but I think that I should ask it. Obviously, all rectitude has been blown out of the water by coronavirus. All the sense that we have about budgetary responsibility has completely disappeared over the past 15 months. As a body, are you working on that to see what on earth has happened? Basically, money was thrown at the problem, maybe quite rightly so, at a phenomenal rate. I am sure that not all of the decisions were responsible in a budgetary sense, or anything like it. Do you have plans to look at that in a UK-wide context, or do you expect each of the devolved Administrations to look at that?
Mr Hughes: You are right: we have seen an unprecedented expansion, particularly in public spending, to combat the pandemic and its economic effects. There are three distinct kinds of scrutiny, and we have applied two different kinds of scrutiny to that. The first is that we have scrutinised the costings of the Government's measures to make sure that they are as accurate as we think that they could be for spending on things such as the furlough scheme, test and trace, vaccines and grants to businesses. We have made sure that we think that those cost estimates are credible. We have certified those, essentially, as the Government have made and announced those decisions.
Our second type of analysis is evaluating how realistic are the plans of the Government, having ramped up all of that spending, for ramping it back down or putting the genie back in the bottle, as it were, once the pandemic is over. The Government have set out plans for scaling back all pandemic-related spending by the end of this financial year, which is March 2022. We raised concerns about the realism of that assumption, because it does not make any provision for things like catch-up funding for missed NHS procedures; capacity for standing test and trace; revaccination, should we need booster jabs in the future; or long-term support for public transport. In our most recent economic and fiscal outlook, we highlighted that as a risk to the Government's fiscal plans. Next month, in our fiscal risks report, we will have a special focus on the pandemic and its legacy on public finances, including what kind of medium- and long-term pressures the pandemic might leave behind for the Government to contend with. That is the second kind of analysis that we have done: the sustainability of the post-pandemic spending path.
There is a third kind of analysis, which we do not provide, because it is really within the purview of audit offices. It is scrutinising the value for money of that spending and the bang for your buck that you get out of it. The National Audit Office (NAO) here is doing a great job on that. We do not see ourselves as being auditors or scrutineers of value for money or efficiency. That is an issue for the Northern Ireland fiscal council, because that has been put in its mandate. How it interprets and pursues that will be a bigger question for you to debate and discuss. That does not fall within our remit, and, to be frank, I would not really want it to, because we are not auditors. Our comparative advantage is not going into the detail and not making value judgements about what was and was not worth spending. The NAO does that very well, and I am very happy to leave that function to that office.
Mr Catney: Thank you, Richard. My questions will not take very long. I feel like Jim. At least, Jim, when you have had a drink, you know what brought on the bad feeling the next day. You and I will be tortured in that Chamber again, but it is a case of no pain, no gain — there you go.
To what extent, Richard, has the OBR improved the understanding of government among elected representatives? I ask that question because everything that I do on this Committee seems to be rushed. I do not feel that I have the time to analyse all the effects that things can have. What have you brought or can you bring to representatives to give them a better understanding of what is going on within government?
Mr Hughes: I think that it has improved understanding. I will emphasise a few things. Before the creation of the OBR, there was a much debate and scepticism amongst legislators about the realism of the Government's economic forecasts and whether those were being deliberately inflated to try to be more optimistic about the outlook for growth, for example. That part of the debate has, I think, gone from here in the UK. People can criticise us for getting it wrong, but they cannot criticise us for being institutionally over-optimistic because we are under pressure to be so.
The second thing is that there is much more transparency around the detail of government policy and the assumptions that underpin different elements of the forecast. For example, even if you get the economic forecast right, if you are too optimistic about corporate profits, you can still get the forecast for corporation tax wrong. There is much more detail on what underpins different assumptions and what underpins the key tax and spending lines in the Budget.
The third thing is that the reports that we produce on sustainability and risk bring greater scrutiny to long-term pressures and to the potential shocks and threats to public finances. Look, for example, at how much detail there is about the Government's loan guarantee scheme for businesses. We provided a lot of detail for people to scrutinise. In the old way of doing things in the UK, before the OBR was created, that detail was off-balance sheet and off-Budget.
Mr Catney: Your charter indicates that you must have regard to the policy. I am looking at that for Northern Ireland. Do you not think that you are in an elevated position from which you could give much-needed critical advice about some of the policy decisions that are made by the Government? At the moment, you do not.
Mr Hughes: Part of maintaining our independence and constructive engagement in the process is not becoming a commentator on policy. Some fiscal councils in other countries have been councils of wise men and women who provide sage advice to Finance Ministers about what to do on fiscal policy. They tend to become just another voice in the fiscal debate, and not a particularly privileged one. In the UK, we are not short of smart people talking about where fiscal policy should go, and the same is true in Northern Ireland. I am not sure that adding another voice to that will necessarily lead to better policy. That debate needs better information, and a fiscal council can provide a more informed debate rather than, necessarily, a new voice in the debate.
Mr Catney: That would be great, if we got it. I live in hope. If you could enhance your powers, what enhancement would you choose for the Office for Budget Responsibility?
Mr Hughes: I am very happy with the powers that we have; I am certainly not eager to engage in mandate creep. We, and you in Stormont, would benefit from greater clarity about timetables and processes for putting Budgets together. This has been a really tough year for everybody. You are staying late into the night to scrutinise licensing laws; I am sure that the same thing happens with Finance Bills and Supply Estimates. That is often because decisions are taken late about when to bring things to Parliament, giving Parliament limited time to scrutinise information, and decisions being made in a hurry. The more predictability that we can provide on the timetable for Budget policymaking, the better for all concerned.
Mr Catney: I hear what you say. Just to be light-hearted, my colleague Jim Wells made a good point last night when he said that we in Northern Ireland chose to do both on the one day. [Laughter.]
The Chairperson (Dr Aiken): Richard, thank you very much for your evidence. We will be delighted to keep in touch. The Office for Budget Responsibility is, in some respects, the gold standard that many of us wish to emulate. The interrelationship between the OBR, the devolved Administrations and the independent fiscal councils will be vital. Finally, the Finance Committee would like to see that interrelationship not only between the independent councils across the piece but between our Committees. We will look at doing that as another role. Independence, scrutiny, openness and transparency are all key to where we are going. Thank you very much for your time and evidence.