There are conflicting incentives for the Treasury after the Bank of England’s (relatively) high growth forecast for Britain next year.

If the Treasury assumes BoE growth is right, they can afford to be bolder in reducing the deficit (the current plan is to halve the £175bn deficit over four years). This appears to be what the Bank would prefer: Mervyn King has criticised the lack of ambition in fiscal consolidation, and the Inflation Report insists that “reducing those [structural] deficits is part of the necessary rebalancing of the UK economy”.

But the Treasury could also bank the faster growth forecast and keep the same fiscal forecasts, effectively a loosening of fiscal policy in the run up to a difficult election for Labour. Read more