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The Governor of the Bank of England has suggested that the official fiscal predictor of the UK is too optimistic about the prospects for a recovery of productivity growth, which questions that is crucial for public finances.
Andrew Bailey said that the office for budget responsibility had predicted that there would be a recovery of productivity growth after a fall-off after the financial crisis, but that the boe was “skeptical”.
“If you would take what I would call the OBR story loosely, I think you would say more that it was a financial crisis and that effect would wear out,” Bailey told a House of Lords Committee on Tuesday. “I’m a bit skeptical about that.”
The words of the governor will contribute to worries about predictions that are a critical factor in the prospects of the OBR for public finances, given the role of higher productivity in stimulating higher tax revenues. The OBR in its March Outlook warned that an alternative “lower productivity scenario” would lead to the British government missing its most important tax target, whereby the current budget remains a shortage at the end of the decade.
After the financial crisis, the OBR assumed that potential productivity growth would return to his previous rate. But it is forced to mate those estimates as the data continue to disappoint, which reduces the productivity growth assumption in the medium term from approximately 2.2 percent to 1.25 percent.
The latest prospects remain more positive than the prospects of many other predictors, which leads to speculation that Chancellor Rachel Reeves can be hit by a large OBR Downgrade in the autumn, which requires tax increases or other measures to close the deficit.
“They have a little more a reversal of productivity growth to the pre-financial crisis pattern than we do,” said Bailey in the House of Lords Economic Affairs Committee. The OBR refused to comment.
The governor said that it would require great technological developments to stimulate much higher productivity growth, which indicates artificial intelligence as the most likely candidate.
But he said that such innovations took a long time to appear in actual productivity data. “We are all experimenting with AI at the moment,” he added.
Bailey argued that three important “headwind” put pressure on public finances in a series of advanced economies-the tax pressure of a aging population, the costs of adapting to climate change and the end of the post-cold war dividend, forcing countries to abolish defense expenditure.
He spoke while leaders prepared to gather for a NATO top in which President Donald Trump demands that allies collect the spending on defense to 5 percent of GDP.
“I think it is important – and I don’t want to sound predachy about this – that we have a good debate with the public about the implications of all this and what it means for the evolution of the economy and the evolution of the government debt,” Bailey said.
Fear has risen on global bond markets on the sustainability of the debt of Big Economies, as higher interest rates since the pandemic combining with massive sovereign debt issue, which is expected to reach a record of $ 17 tn in OECD countries this year.
The costs of the debt runs as a share of the economic output are at their highest decades, and the promises of defense expenditure and other recent tax incentive announcements are expected to contribute to the pressure.
Bailey doubted the focus of the market on the forecast of the OBR of five years before the current budget, given the tax uncertainties that are for us. The OBR said in March that Reeves barely would meet her most important rule for the current budget balance with slightly less than £ 10 billion.
“There is a danger to insult a five -year prediction,” he said.
The Governor added that the BOE would soon carry out an internal assessment of plans for reducing his balance via quantitative sharpening (QT), ahead a decision about the sale of bonds in September.
Bailey said that this would take into account recent reductions of bonds, amid turbulent conditions in the global markets.
“This year is going to be more interesting because we have looked at the interest curve quite a bit,” said Bailey, emphasizes that this had been seen in all major economies and so it was not driven by QT. “It’s a slightly new territory.”
