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Thursday, March 26, 2009

English Bank Governor Tells Prime Minister: Stop Spending

Mervyn King warns Gordon Brown to stop spending

The Governor of the Bank of England laid bare tensions between Gordon Brown and the Treasury yesterday by warning that Britain could not afford a second economic stimulus in the Budget.

Mervyn King threw caution to the wind as he sided with Alistair Darling and the CBI against Downing Street in raising strong doubts over any prospect of another round of “significant fiscal expansion” next month.

Mr King spoke as the Prime Minister, beginning an international tour to co-ordinate measures for next week’s G20 gathering in London, called on leaders to do “whatever it takes to create growth and the jobs we need”.

President Obama, Mr Brown’s main stimulus ally, writes in the same vein in The Times today, saying that America is ready to lead the world out of recession, while calling for swift and robust action to stimulate growth “until growth is restored”.

No 10 and the Treasury deny any split but ministers admit that Mr Brown is keener than his Chancellor to go for further expansionist Budget measures on April 22.

Mr Darling said two weeks ago that a fiscal stimulus “has now been widely agreed but now needs to be implemented”, hinting that he believes a second boost is unnecessary and unwise. There have been no similar signals from No 10.

Bank governors do not normally talk about Budgets in advance, just as ministers do not comment in advance about Bank decisions on interest rates. The conclusion drawn from the unusual intervention of Mr King, who met the Queen yesterday in her first audience with a Bank governor, was that he was backing the Treasury in resisting pressure for a further stimulus. It seems certain that his already strained relations with No 10 will hit a new low.

Mr Brown told the European Parliament in Strasbourg: “I believe that we are seeing the biggest cut in interest rates the world has ever seen and seeing implemented the biggest fiscal stimulus the world has ever agreed.”

However, Mr King, appearing before the Treasury Select Committee, pointed to the size of the financial deficit and said: “It would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits.”

He gave himself some leeway by saying that “targeted and selected” measures should not be ruled out. However, monetary policy — interest rates and quantitative easing — should bear the brunt of restoring the economy to health, he said.

George Osborne, the Shadow Chancellor, said that Mr Brown was now “isolated at home and abroad”. He claimed that Mr King was vindicating the Conservatives’ stance and that Mr Brown’s plans for the G20 and the Budget were “in tatters”.

No 10 and the Treasury appeared relaxed about Mr King’s remarks but some ministers close to Mr Brown were irritated at the “unhelpful” and “poorly timed” intervention.

Britain was urged by Brussels, meanwhile, to make “additional efforts” from next year — code for tax increases or spending cuts — to reduce its burgeoning budget deficit. The situation had worsened substantially since last summer, the European Commission said, as it gave Britain a new target of 2013-14 for cutting its deficit back to below 3 per cent of GDP, replacing the previous target of 2009-10. This leaves Britain with the longest planned period of “excessive deficit” in the EU, after a target of 2010 was given to Greece, 2012 to France and Spain, and 2013 for the Irish Republic.


My Thoughts

The stimulus backlash seems to be spreading outside our borders. Maybe we can start "tea parties" overseas. After all, England is more into tea than America is.

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