Free Trial

BOE Insight On Gilt Reinvestments


Gaining Ground


Q1 US Earning Generally Ahead of Forecast


‌‌(H2)‌‌ Remains Vulnerable

Real-time Actionable Insight

Get the latest on Central Bank Policy and FX & FI Markets to help inform both your strategic and tactical decision-making.

Free Access
MNI (London)

The Bank of England is factoring implausibly low government spending plans into its economic projections, an economist at leading think-tank the Institute for Fiscal Studies told MNI.

By convention, to avoid being seen to be passing judgement on fiscal policy, the BOE plugs in the latest fiscal projections as given, and it will use numbers from the government's March budget in its August forecast round. Some economists have argued that this skews its forecasts, by continually underestimating government spending and deficits, and work by IFS suggests the problem is occurring again, Ben Zaranko said in an interview.

The five-year forecast included in Chancellor of the Exchequer Rishi Sunak's budget, which showed him coming within a billion pounds of balancing the budget at the end of the period, ignores upwards pressures on public spending and assume no extra Covid-related spending from the start of the next fiscal year in April, Zaranko said.

"The fact that the current plans allow for precisely zero pounds of any coronavirus related public service spending after next April, given what we know about NHS (National Health Service) waiting list backlogs and the need for an ongoing vaccination programme and the need for test-and-trace and we know that there is huge clamour for more funding for schools to help catch-up … given all those things it seems completely implausible to me that the Treasury can maintain those plans in the form that they are," Zaranko said.


The IFS re-ran the fiscal projections in conjunction with economists at Citigroup. It estimates that that the recent improvement in the public finances, with the deficit coming in around 1% less than the most recent official forecast, does little if anything to change the bigger picture.

The recent bounce back in economic activity is "just bringing forward growth rather than any additional growth … The quicker short-term recovery is nice to have but the really important thing is to what extent can we get back up towards that pre-pandemic growth path, which in itself wasn't particularly awe-inspiring," Zaranko said.

The Citi forecast for the IFS has growth of 10.5% in the 2021-22 fiscal year, but this slides back to 3.1% in 2022-23 and just 1.9% in 2023-24. BOE Monetary Policy Committee nominee Catherine Mann, a former OECD and Citi economist, made the point Monday at her MPC confirmation hearing that this profile of a slump back to soft growth in 2023 and 2024 was shared by most major forecasters, with the attendant downside risks.

Zaranko pointed out that it seems to be nearly inevitable thatactual spending will have to be higher than currently assumed and that the Autumn Budget and spending review could repeat some of these implausible assumptions.

"Despite all the huge cost pressures that have emerged from the damage from the pandemic, on top of the upward pressures on public service spending because of a decade of austerity and an ageing population, the fact is that in that context the Chancellor is planning to spend GBP16 or 17 billion less per year than he was back in March 2020," he said.

"Spending plans are often topped up, particularly in areas like the NHS. But this time it feels almost like a near certainty (that they will be), the only question is how much?" he said.

MNI London Bureau | +44 203-586-2223 |
MNI London Bureau | +44 203-586-2223 |
Sign up now for free access to this content.

Please enter your details below and select your areas of interest.