The Treasury should use price controls and cuts in VAT during the cost of living crisis to prevent the Bank of England from driving the economy into recession through over-aggressive use of interest rates, a thinktank has said.
Warning of the need for the two institutions to stop operating from separate silos, the left-leaning Fabian Society said poor policymaking in the past quarter of a century had often been the result of the Treasury and the Bank pulling in opposite directions.
The thinktank said in a new pamphlet that a joined-up approach was essential to solve the economic challenges faced by the UK: weak growth, flatlining productivity and wages, high inflation, poor business and public investment, regional inequality and the urgent transition to net zero. “These problems are interconnected – but economic policymaking is not,” the Fabians said.
The Fabians said there was a need for an explicit role for the chancellor when cost of living pressures were acute and that there should also be new rules for running the economy when interest rates were close to zero.
In times when official borrowing costs could not be reduced further, the Bank of England governor would write to the chancellor saying that the limits of monetary policy had been reached and it was up to the Treasury to stimulate activity through tax cuts and public spending increases.
The last big shake-up of the UK’s economic framework came in 1997 when the then chancellor, Gordon Brown, made the Bank of England independent and handed it the role of setting interest rates. When George Osborne became chancellor in 2010, the Treasury relied on the Bank to deliver growth while it was imposing austerity measures.
Interest rates were cut to a then record low of 0.5% in early 2009 and remained at rock-bottom levels until the Bank began a series of moves that took official borrowing costs from 0.1% in December 2021 to their current 5.25%.
Michael Jacobs, a professor of political economy at the University of Sheffield and one of the report’s authors, said the idea of the Bank of England having sole responsibility for managing demand worked in benign times but had been found wanting during the multiple crises of recent years. “In more extreme circumstances we need monetary and fiscal policy to be working together,” he said.
The Fabian pamphlet – In Tandem – said a new economic policy coordinating committee should be set up to bring together the Treasury, the business department and the Bank of England, alongside the devolved governments and arms-length bodies responsible for climate change, public finance, infrastructure and low pay.
It said the sharing of analysis and policy planning would enable economic policy to be better coordinated, and thereby better able to meet a range of economic, environmental and social goals. The committee would be jointly chaired by the chancellor and business secretary and would feed into the Treasury’s two set-piece events: the budget and the autumn statement.
“Economic policy is more difficult than it used to be,” Jacobs said. “The government has multiple goals: not just growth and employment, but lower carbon emissions, higher wages and reduced regional inequalities. That requires much better coordination of policymaking. Relatively modest reforms, including the creation of an overarching economic policy coordinating committee, could greatly help the next government succeed where the current one has failed.”
Jo Michell, a co-author of the pamphlet and a professor of economics at UWE Bristol, said: “The need for better coordination between fiscal and monetary policy is increasingly clear. Current challenges require a more flexible approach. Getting the Treasury and Bank of England to work together will enable economic policy to add up to more than the sum of its parts.”
