The institutions Liz Truss hated are still not safe from firing squad

What is the state of the UK’s independent economic institutions? Specifically, the Office for Budget Responsibility (OBR) and the Bank of England. If you believe former Prime Minister, Liz Truss, the OBR was close to being abolished in 2022, and the Governor of the Bank of England, Andrew Bailey, should now be fired for his role in the fallout from the Mini Budget. It would be easy to dismiss these as the attention-seeking ramblings of someone keen to deflect blame and sell books. However they do perhaps indicate a wider worry that these relatively new economic arrangements – the Bank of England was granted operational independence over monetary policy in 1997, and the OBR established in 2010 – have emerged as U.K. productivity and real wage growth has lagged that of comparable economies.

This is not columnist gaslighting by suggesting that the Bank of England and OBR are in any way responsible for the UK’s recent poor economic performance. Decades of underinvestment relative to the UK’s G7 peers and several big regulatory and political errors are far more credible explanations. However, the longer that this underwhelming economic performance persists the more likely that our MPs will widen the search for scapegoats. The appropriate metaphor for Truss may not be a lettuce on a plinth, more a canary in the coalmine.

It is worth reiterating that it is not a bug, but a deliberate design feature for the OBR to deliver politically challenging analysis and for the Bank of England to deliver politically unpalatable monetary policy. The costs from governments presenting fiscal fiction and from interest rates being geared for political gain – at a cost to us all – are well established. Furthermore, the institutional structures surrounding the Bank of England and OBR mean their decisions and judgements are accountable to Parliament. And it is not as if these institutional features make the UK an outlier. The fastest growing developed economy, the US, have an independent central bank – the Federal Reserve – setting interest rates, and a Congressional Budget Office scoring the Presidents’ 10-year budget plans. The US has still seen its economy grow at twice the pace of the UK since 2008. But even in the US the attacks from both sides of the political aisle have intensified in recent years. If President Trump is to return to the White House in 2025 with limited financial wriggle room – US fiscal policy is already eye-wateringly loose – it is inconceivable to think he wont go on the attack. The independent institutions seen as the checks and balances on his economic policies will be in the firing line.

Looking ahead to 2025 in the UK what we are about to experience are events that neither the independent Bank of England nor the OBR have navigated before. Their judgements will be more acutely watched than ever. Let’s take the Bank of England first. Putting aside the recent Ben Bernanke-led review on the Bank’s forecasting and communications – which was largely an exercise in ‘looking like something is being done’ in response to the highest rate of UK inflation in four decades – the real challenge is how the Bank’s monetary policymakers use their renewed interest rate headroom and continue to exit a period of remarkably high asset purchases. With interest rates at 5.25% and the Bank’s ownership of UK government debt still at £725bn these are highly contentious tasks.

The Chancellor, Jeremy Hunt, has already begun to speculate on the timing of interest rates. Whilst stopping short of calling for them there is little doubt this is a carefully calibrated statement of what the government wants to see ahead of the General Election. And when it comes to the Bank selling off government debt, think tanks sympathetic to the Labour Party have called into question an asset sale program from the Bank that has a potential total cost to the taxpayer of £104bn. These are policy judgements rather more toxic than when interest rates were near-zero, and assets were being purchased that initially delivered a £124bn profit for the taxpayer.

Over at the OBR the ratcheting up of political pressure is no less acute. Treasury insiders talk of an impressive empirical rigour with which the OBR assess the impact of tax and spending decisions. But the lifetime of the OBR has – to date – only faced off to a Conservative-led government. That looks set to change. This presents two risks. Firstly, that one of the OBR’s biggest supporters – Shadow Chancellor Rachel Reeves who is proposing extending the powers of the OBR in a revised fiscal charter – experiences similar levels of challenge that the seven Conservative Chancellors since 2010 have faced. Will this change her level of support? Enthusiastic advocates of independence and devolved powers in opposition regularly become repentant centralisers when in government.
Secondly, if the Conservatives do find themselves in opposition after the next Election their surviving MPs and advisers will be closely watching whether OBR assessments applied to spending proposals by a Labour government are commensurate to tax proposals oft put forward by Conservatives. This “dynamic scoring” of policy is a frontier on which Democrats and Republicans fiercely fight over in the US. How the OBR sees this in the U.K. context is set to a huge political hot potato in the next Parliament. The decision of the current OBR chair, Richard Hughes, to generously describe future departmental spending plans laid out by the Chancellor as a “fiction” did nothing to dial down the likely heat to this debate.

So where do these storm clouds leave the UK’s independent economic institutions? In the short term they are probably highly secure in their current guise. Financial markets worried about a Labour government campaigning on “Securonomics” and governing with “Corbynomics” can be thankful for the lessons from Truss’ six weeks in power. One of the enduring economic gifts left by Liz Truss’ premiership is that the next few UK governments will be deferential to the role of these independent organisations. But let us not pretend that this deference will eliminate underlying tensions – particularly if UK growth continues to be disappointing.

Published on The Times: 22 April 2024