8 hours ago
11
The Bank of England governor, Andrew Bailey, has waded into the controversy over Rachel Reeves’s fiscal rules with a warning against “over-interpreting” the Office for Budget Responsibility’s forecasts.
The chancellor announced spending cuts in her spring statement in March to rebuild headroom of £9.9bn against her fiscal rules based on projections from the OBR.
These include the welfare cuts that have sparked a major backbench rebellion ahead of a House of Commons vote next week.
Bailey said there were risks in being “constantly focused on a £9bn number” instead of looking at broader issues around the sustainability of the public finances.
“I think it’s just important to emphasise that this figure of £9bn is a five-year-ahead forecast,” he told members of the House of Lords economic affairs committee on Tuesday. “If we know one thing about forecasts – it won’t be £9bn.”
He added: “There is a danger in over-interpreting a five-year-ahead forecast.”
Bailey said it was not for the Bank to make suggestions as to how to change the fiscal framework, but raised concerns about the current situation, in which investors are constantly assessing Reeves’s next move on the basis of minor changes in the economic outlook.
“I just caution because having the financial markets marking fiscal policy to market on a daily basis is not a good state of affairs,” he said. “I don’t think I’m probably at odds with anybody around government in saying that.”
Bailey stressed the need for a public debate around the longer-term challenges to fiscal policy, including the ageing population, the end of the post-second world war peace dividend and the need to spend more on adapting to the climate emergency.
Bailey’s warning echoed concerns expressed by the International Monetary Fund in its annual report on the UK economy last month.
In a generally positive assessment of the UK, the IMF said that “small revisions to the economic outlook can erode the headroom within the rules, which is the subject of intense market and media scrutiny”. It made a series of suggestions, including requiring only one OBR forecast instead of two.
Speculation is already mounting ahead of the autumn budget that Reeves could be forced to announce fresh tax rises, with the OBR known to be revisiting its forecasts for productivity, which look optimistic relative to those of other experts.
Asked about the outlook for interest rates, Bailey told peers that he expects them to continue falling after the four cuts the Bank has made since last summer – but he stressed the rising unpredictability of the global backdrop. “I’ve been very clear that I think the path’s downward in my view and will continue to be so.”
He also emphasised the Bank’s continued concerns about the quality of data emanating from the Office for National Statistics, including a recent admission that it had overstated consumer price inflation for April.
“It is critical from our point of view that these issues are addressed,” Bailey said. Discussing the inflation glitch, he added: “That was to do, as I understand it, with a spreadsheet that had a number in there for the number of vehicles that were on one particular level of fuel duty relative to others, which was wrong.”
