The OBR and the Bank of England: silence on their role in economic management?

Right at the heart of economic decision-making in the UK lies these two powerful bodies both unelected and unaccountable.

Readers may be tempted to take one look at the topics and give this piece a bye. The process in terms of how economic policy is formed and implemented is dull stuff for most of us who are not in think tanks, academia, and avid readers of the economic journalists who appear in the back pages of the newspapers. But it does matter, and the present process and the structures it operates should address serious questions in what we believe is a democracy, where accountability to the people is the bedrock of the system.

The general election campaign is coming to its close.  The public finances are in a dreadful state: in 2023-24 the difference between what the government took in taxes and what it spent was £120.7bn, bringing us to a total national debt of £2.7 trillion, and debt interest payments of £90bn, higher than the outlay on defence. The way out of this vast hole both major parties tell us is through economic growth – that is the economy produces more goods and services by an expanding and more efficient business base, the workforce raises its income, and so there is more business and income tax to come into the Treasury’s coffers, which will allow it to gradually pay off a good part of the debt over time.

Given the stark economic facts, how the economy is to grow should have been at the front and centre of all debate. But that has not been so.  Marginal issues such as whether women have a penis (with JK Rowling commanding the front page of The Times to slice and dice Starmer and Co) and foolish gambling by Tory insiders became big issues while on others that matter on the economy there was silence.

On “others” that have decisive effect upon the judgment of a Chancellor, the Office of Budget Responsibility, and on the economy in a profound way, the independent Bank of England, there was not one word.  

Right at the heart of economic decision-making, lies these two powerful unelected, unaccountable bodies.

The Office Of Budget Responsibility

The OBR forecasts on the public finances dictate what the Chancellor can do about how much to tax us, what to spend, and what to borrow.  Each Chancellor since the creation of the OBR cites it as gospel in his budget speech. Liz Trust’s Chancellor conspicuously ignored the OBR and the heavens fell in on her and him.   

The OBR claims to be “independent” in providing its analysis of the public finances. That claim to independence becomes a little bit doubtful given that it is funded by the Treasury, appointed by the Chancellor and can be dismissed by him subject to the agreement of the House of Commons Treasury select committee. But much more important is its other claim to be “authoritative” which implies some high degree of accuracy in its forecasting.   

The OBR is required, and does, publish a report contrasting its forecasts with actual outturns in various aspects of the economy.  It doesn’t have the kind of record you would expect when you hear the Chancellor citing its forecasts.  Here is a couple of examples from its own report: In 2021 inflation was 8.2% higher than forecast, and 2% higher than forecast for 2023. On GDP 2022-23 it overestimated growth by 3.3%.  These are not marginal errors.

Forecasting errors by the OBR is not a recent thing. Its forecast for economic growth from 2010 (the year it was created) to 2012 was 5.7% whereas it was only 0.9%. For business investment it was 10% for 2012, but an outturn of only 0.4%.

In its latest report the OBR admits “To a significant extent these differences between outturns and previous forecasts are inevitable given the inherent difficulty in forecasting the path of the economy and the consequent effect on the public finances……………..but some differences are due to genuine errors, which would have been corrected before the forecast was finalised if we had spotted them.” (italics inserted) This admission is refreshing, but it begs the question as to why successive Chancellors keep citing its findings as an impeccable guide to making sound economic judgements.

Nothing the OBR does could not be done by the Treasury itself, headed by a Chancellor accountable to the House of Commons, and eventually the people. So why do we still have it?

The Bank of England

Until the Labour Government came into office in 1945, the Bank of England was a private institution, but different from all other banks in its power because it was in effect the Government’s banker.  The 1945 Labour manifesto stated: “The Bank of England with it financial powers must be brought under public ownership, and the operations of the bank harmonised with industrial needs.” The Bank was nationalised in 1946, and thereafter that key element of economic policy, interest rates, were set by the Chancellor of the Exchequer.

As Nigel Lawson, Chancellor in 1987 put it: “I make the decisions and the Bank carries them   out.”  But then he and others started buying into the idea that because politicians in government were either not handling interest rate policy well (the John Major/ Norman Lamont fiasco of crashing out of the ERM with interest rates reaching 15%) or manipulating them to gain electorally, the Bankers would be both honest and competent in safeguarding the people’s money.

And so, when Gordon Brown became Chancellor in 1997, the Bank was made “independent” as he was “now satisfied that we can put in place, with immediate effect, reform of the Bank of England to ensure that it can discharge responsibilities for setting interest rates in an effective, open and accountable way.”  It is possible to describe his policy in another way: the Government gave up control of a major economic tool to another body, an unelected one.   

The Bank is open about setting interest rates, with the publication of the minutes of the Monetary Policy Committee, but whether it is “effective” and “accountable” is open to question.  It is effective for the banking community, which is not the same thing as the people. Individual banks are required to deposit part of their funds with the Bank of England,and receive interest on them. Robert Peston has pointed out that the interest rate paid to banks, set unilaterally by the Bank of England,  is 5.25%, much higher than inflation and much higher than the banks are paying to their own depositors. This sub to the banks is worth £40bn a year.

Accountable to whom?  Not to the people. It is generally accepted that the Bank of England has bungled interest rate policy by keeping rates too low for too long, printed too much money through Quantitative Easing thus inflating asset prices (making the rich richer) and giving an upward high kick to inflation; which in turn has necessitated high interest rates in an attempt to curb the inflation it created. This was confirmed by the former Chief Executive, Andy Haldane, telling a tv interviewer the Bank of England “regrettably” made mistakes that have fuelled inflation.  No one at the Bank has been sacked. Accountable?

Yet, despite this dismal record that has been anything but beneficially effective, the Bank’s independence is not an issue in the election, and will, it seems, continue to be the most important lever on the economy that effects all other levers: liquidity, bank lending, levels of investment (crucial for growth and productivity), value of the currency in world markets, cost of living, cost of debt on mortgages and credit cards.  The kind of things that matter, but however are not in the hands of the Chancellor in what we believe is the elected government responsible to us.