The Government's "consistently over-optimistic" growth forecasts may have forced the Bank of England into raising interest rates higher than it would have liked, a powerful House of Lords committee said today.
The economics affairs committee, which includes two former Chancellors and one Bank governor, said the Treasury's GDP forecast had been too high for the past five years. The committee argued that this had been unhelpful to monetary policy, hampering the Bank of England's task of setting interest rates, and even contributing to increases in interest rates once the true picture became clear.
The report will add to recent criticism of Gordon Brown's record in the wake of claims that he used this month's pre-Budget report to re-announce education spending measures and slap another £7bn on Britons' tax bills.
The chair of the committee, the former Tory energy secretary Lord Wakeham, said: "The over-optimistic predictions for growth that have consistently been produced by the Treasury have masked the true budgetary position and made it harder to make accurate judgments about interest rates."
The committee picked on the revisions to the public finances in the PBR, which raised the estimate of the deficit in 2005-6 to £15.1bn from £11.4bn in the April Budget. Similarly, the £7bn surplus for the 2008-9 year was cut to just a £4bn surplus.
The report said that despite recent increases in taxes, the budgetary position had "deteriorated" over the past year.
"The reason for this seems to be a downward revision to the forecast rate of GDP growth. The evidence shows that the Treasury's forecast of economic growth has been too high for the past five years," its report said.
"Our main concern here about these fiscal projections relate to their implications for monetary policy and, in particular, whether the fiscal stance - which is even looser than was first forecast by the Treasury - contributed to increases in interest rates."
The sting of the report may be drawn to some extent by the fact that the committee includes heavyweight former Conservative politicians such as Lord Lamont and Lord Lawson, both former Chancellors. The Treasury issued a firm rebuttal, claiming its record was "good" despite the "complexity" of fiscal and economic forecasting. A spokesman said forecasts were "generally in line with consensus on both economic growth and the public finances". He added that what mattered for the Bank was its focus on hitting its 2 per cent inflation target.
The committee also raised concerns about appointments to the monetary policy committee. It argued that the process, where new external members were appointed solely by the Chancellor, was "shrouded in mystery".
It pointed out that new members increasingly lacked prior expertise in monetary economics. The committee called on the Government to establish a single four or five-year term of service for outside members and said the selection process should be "far more transparent".
Although the committee did not name any individuals, selection of MPC members, such as Richard Lambert, who had carried out in-depth reports for the Treasury but who is not a trained economist, had raised eyebrows in the City. However, Mervyn King, the Bank's governor, has always defended Mr Lambert's record.Reuse content