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MNI INTERVIEW:Spending Boost Makes BOE Estimates More Credible

MNI (London)

More realistic government spending plans mean the BOE's projections are more likely to be accurate, an IFS economist tells MNI.

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The risk that UK government spending could exceed Bank of England assumptions has declined markedly following tax and spending increases announced by Chancellor of the Exchequer Rishi Sunak, Institute for Fiscal Studies Ben Zaranko economist told MNI.

Projections in the BoE's November Monetary Policy Report, which must incorporate government plans at face value, will be much more credible thanks to new fiscal arithmetic to be included in the Budget on Oct. 27, Zaranko said in an interview.

Economists had previously pointed to the danger that the Bank, now debating monetary tightening, could underestimate the government spending component of its growth forecasts, with the Treasury facing intense pressure to exeed what Zarenko called implausibly low expenditure estimates outlined in the March budget.

"There has been a big tax rise … and I think that means that the spending totals are a hell of lot more plausible than they were," Zaranko said.

Sunak has unveiled plans to boost health spending, as well as to hike national insurance, a payroll tax, for employees and employers by a combined 2.5%.

Despite a stretched National Health Service facing a large backlog of work and creaking social services following the Covid shock, the Treasury's March spending plans had been based on meeting demand within existing budgets.

"Obviously that wasn't a sustainable position," Zaranko said.


He warned, however, that while Treasury plans now look more credible, it could face more spending pressure.

"It seems like quite an institutionally weak Treasury in terms of its political influence compared to where it has been in the past," Zaranko said, citing the government's internal debate over bailing out energy-intensive businesses.

"I think the Treasury could be at risk of being overruled by a happy-spending Prime Minister," he said.

The IFS's Green Budget, which looks at national finances based on macro-projections by Citi, showed public spending-to-GDP rising to 42% from 40% pre-pandemic.

"Even pre-Covid this was a Conservative government planning for an increase in the size of the state," Zaranko said. "One of the big reasons was this ramping up of investment spending to get it closer to 3% of GDP rather than hovering a bit less than 2%."

The economy has shrunk while the population is ageing and "given those well-known demographic pressures, that direction of travel seems only certain to continue," Zaranko said.