OBR chief accuses Bank of being overly pessimistic about economy

THE Bank of England has been accused of being overly pessimistic about its outlook for the UK economy by the Government’s official tax and spending watchdog.

Richard Hughes, chairman of the Office for Budget Responsibility, said Threadneedle Street was an “outlier” compared to other forecasters.

Yesterday, he told the Treasury select committee: “The OBR’S forecast is more optimistic for the growth outlook than the Bank’s forecast, we have a shorter recession and we recover to a higher level of GDP than the Bank.

“It’s actually the Bank which is a bit of an outlier in being so pessimistic, in particular about the length of the recession that we both think has already begun.”

He added that the Bank was a “techno-pessimist” in its assumptions about the pace of technological growth and how it will influence economic activity.

“I think the people who are very pessimistic about the outlook for technological growth and those who think at some point we are just going to go back to the world we were in the late 1990s/early 2000s [are wrong],” Mr Hughes told MPS.

It comes after the OBR warned last week that Britain’s cost of living crisis will wipe out eight years of growth in household incomes and plunge the economy into a recession lasting more than a year.

Earlier this month, the Bank warned that the UK will fall into its longest ever recession as it raised interest rates by the most since Black Wednesday.

While both institutions agree there is a downturn, Mr Hughes said the OBR’S longer term growth projections are more positive than the Bank’s. In part, this reflects the fact that the OBR used interest rate expectations and energy price futures that differed from those relied on by the Bank. The OBR’S latest assessment used more up-todate data.

The OBR is also predicting that more people will use their savings to support spending habits despite continued cost-of-living pressures. However, MPS were warned that “2023 is going to be

a very difficult year” for households as bills continue to rise.

OBR committee member David Miles said the impact of rising interest rates and continued inflation will cause pressure next year, but they are predicted to turn a corner in 2024.

Speaking to the Treasury select committee, the economist said: “2023 is going to be a very difficult year, very likely, but the years after it will not be quite as bad.” After last week’s Budget, the OBR warned that household disposable income will be compressed by 7pc over the next two years, reversing gains in living standards and leaving real incomes at the same level as 2013. The shift will mean Britain’s economy will have suffered a “lost decade”.

This year’s 4.3pc fall alone represents the biggest drop in disposable income since records began in the 1950s, as the surging cost of living erodes wages.

Mr Hughes also told MPS that governments should not make fiscal decisions without an “up-to-date economic outlook”, referencing the fallout from then prime minister Liz Truss’s minibudget in September.

The OBR itself has been criticised for making inaccurate forecasts, including by former business secretary Jacob Rees-mogg.

Writing in The Daily Telegraph earlier this week, Prof Miles defended the watchdog’s forecasts, saying they “give a best guess of uncertain future outcomes and an indication of how much uncertainty there is around it”, which “can still be useful”. He compared this with a satnav that predicts a precise arrival time for a particular journey and changes it as the journey progresses. He wrote: “Does that make a satnav useless? It does not. A satnav is not an oracle – it does not know the future and its best guess keeps changing. But it is an informed guess. Most drivers find satnavs useful because a guide is better than nothing.”