In just under a month’s time the Chancellor will deliver his Spring Budget. The challenge for Team Hunt is overcorrecting in political and economic terms in response to Liz Truss’s government.
The former Prime Minister broke a political taboo by questioning economic leadership at the Bank of England and role of the Office for Budget Responsibility. The collapse of ‘Trussonomics’ and her lack of humility should not deter Ministers from revisiting such themes – and, critically, analysing the relationship between government and these institutions, (their accountability, not their independence), the quality of economic forecasting and supply-side reform.
The OBR had its charter renewed last week – a formality – following a tame debate in the Commons. There was some challenge from Conservative MPs, but otherwise the role, remit and primacy of the OBR has not really been scrutinised.
This is surprising on several fronts – not least since the forecasts set by the OBR influence the shape of Government fiscal policy and condition market expectations, so making Richard Hughes, the Head of the OBR, a very powerful figure. However, Hughes will only briefly explain the OBR’s thinking in March, as he makes selected public appearances before returning to relative obscurity.
Arguably, the Chancellor would be well served – economically and politically – were he to use the departure of the Treasury’s Chief Economist, Claire Lombardelli, as a moment to enhance the role so that her successor heads a new Forecasting Unit within the Treasury. This person would provide him with advice and to challenge external international and domestic forecasters – the OBR included.
In such circumstancs, the two sources of advice might align – and might not. In the latter case, the reasons for divergence should be of value to the Chancellor, his team and the forecasters, none of whom have a monopoly on economic wisdom.
Economic forecasting is perilous. The OBR’s inaccuracies do not really set them apart from anyone else. But they do raise legitimate questions about their methodologies and modelling. Similar ones can be aimed at the Bank of England and the Treasury.
The Bank has presided over inflation breaching 10 per cent when its a target is two per cent. Not to hold Andrew Bailey, its Governor, to account would be a failure of political leadership. The extent to which self-examination is taking place at the Bank is unclear.
The present Governor strikes a defensive tone when asked about losing control of inflation. He is keen to gloss over the warnings he received from his own Chief Economist, Andy Haldane, in 2021 about a build-up of inflationary pressures post-pandemic. Bailey prefers to cite international events in 2022 – after the invasion – as the root cause.
It is the duty of Ministers (and MPs) to be probe the Bank about the lessons it is learning from misjudging domestic and international events in 2021/22 and the impact on inflation; as well as any policy misjudgments about the implementation of quantitative easing that may have contributed to runaway inflation.
The impact of high inflation on living standards is well publicised. Indeed, halving inflation tops the list of Rishi Sunak’s five pledges. Less obvious, currently, is the cost of bringing inflation back to target. This week, the European Central Bank’s Chief Economist, Philip Lane, said the “negative impact” on real GDP growth, from tightening monetary policy, is estimated to be around 1.5 percentage points over three years, which he described as “sizeable”. We await the Bank’s equivalent calculation.
In political terms, the Bank’s policy decisions will cut across the Prime Minister’s second pledge to ‘grow the economy’ – and the politics of growth is shaping up to be a key fault-line for this Parliament and beyond. Support for the Autumn Statement among Conservative MPs was offered out of necessity.
But while there are few advocates for unfunded tax policies, there are shades of opinion about the level and proceeds from fiscal retrenchment and tax cuts for stimulating growth. This could evolve into distinct two teams: Team Growth and Team Orthodoxy, moving the Party to familiar terrain in which economic policy becomes elevated and hotly debated, as it was in the late 1970s and 1980s (when being a ‘Wet’ or ‘Dry’ was a shorthand for different socio-economic priorities, as well as differing political styles).
The policies within Kwasi Kwarteng’s Growth Pla’ – welcomed by business groups – are seen by many MPs as necessary to provide stimulus to drive recovery and reach a trend rate of growth at two per cent or above. This agenda is balanced by MPs who lean towards tighter fiscal policy with an emphasis on reducing debt ahead of any radical supply-side measures. Both cite, with good grounds – but sometimes selectively – Conservative precedents regarding aspects of Margaret Thatcher’s economic policies.
In many ways, the 1980s provides examples of all of the above: fiscal retrenchment innovative deregulation, tax reductions and state-led innovation and intervention, from Liverpool at the beginning of the decade to Canary Wharf towards the end. It was a defining and transformative period for the UK and, amongst other things, led to the 1990s enjoying the longest period of low inflationary growth since the Second World War. The period provides is both a legacy and a target for embattled monetary and fiscal policy makers to aim for in the second of half of this pivotal decade.