Here is what Mervyn King told the Treasury select committee today...
"We are confronted with a situation where the scale of deficits is truly extraordinary. This reflects the scale of the global downturn, but it also reflects the fact that we came into this crisis with fiscal policy on a path that wasn't sustainable and a correction was needed.
There will certainly need to be a plan for the lifetime of the next parliament, contingent on the state of the economy, to show how those deficits will be brought down, if the economy recovers, to reach levels of deficits below those which were shown in the budget figures."
A plan?
The UK has the largest fiscal deficit in the developed work. We can not wait for a post-election plan. We need to cut the deficit now.
14 comments:
This is the beginning of a huge row about the BoE and the treasury. The deficit is causing rates to rocket, while the bank wants low rates for growth and lending.
"We can not wait for a post-election plan."
You are right but that is precisely what Labour will ensure happens.
Truly depressing and utterly distasteful.
What Seema said and add to the mix the political side which daren't cut a penny from any social budget, and is a truly lame duck government and we have a recipe for long term poverty, if not social unrest.
I think the only remedy will be to crash the pound and cause huge inflation risking hyperinflation on our island, in the hope that the debts will be inflated away and the inflation genie popped back in his bottle.
I know which side I believe and it isn't lurking in downing street.
Could it not be argued that the refusal by Labour to address the deficit is criminal negligence? You have the Governor of the BoE basically saying that Alistair Darling (which effectively means GB) is doing nothing to remedy the situation, is this unprecedented? Could a private prosecution be brought (by a saver perhaps) on the grounds that the govt is endangering the value of their savings by risking a large devaluation of sterling and rising inflation?
BoE tells Darling to cut the deficit shouts Alice's headline. "We need to cut the deficit now" she opines and quotes Mervyn King in support of such a course of action. In fact, even the most cursory glance at the Governor's statement shows that this not what he is calling for. As Alice herself quotes:
"There will certainly need to be a plan for the lifetime of the next parliament, contingent on the state of the economy, to show how those deficits will be brought down if the economy recovers to reach levels of deficits below those which were shown in the Budget figures."
So, the earliest Mervyn King thinks we should start cutting public expenditure is in the next Parliament i.e. at least 12 months from now. Moreover, such cuts should be dependant on the state of the economy. I take this to mean recovery should be well and truly underway and growth approaching trend before any such cuts are made. Here's a further quote from Mervyn King to emphasise the point:
'If you withdraw stimulus too quickly, you run the risk that the downturn will resume. Equally of course, we need to be very careful not to allow the stimulus to reach the point at which inflation takes off. There is a balance to be struck, this balance is not a theoretical issue it's a practical issue."
So there you have it. The BoE did not tell Darling to cut the deficit. Mervyn King did tell the Chancellor to put in place a credible plan. Nor did he endorse cuts now. In fact he said the opposite. Really Alice, quoting people out of context, putting an unwarranted interpretation on their words – you should become a journalist – or are you one already?
Young Mark
Wish I'd inherited a house so I could take a disinterested view in this spat; as it is their prevarication means I must put off buying and making a home for ANOTHER 3 years, probably.
Honestly. Don't they know I like DIY?
Young Mark,
Actually, the idea of being a journalist is an appealing. Unfortunately, I do this for free.
The problem with this stimulus is that it isn't stimulating. It is sad indictment of Keynesian economics that a government runs a 12 percent of GDP deficit and the economy still shrinks.
Alice
Young Mark,
BTW, are you happy with the current fiscal stance? Doesn't worry you just a little?
Alice
Alice,
Of course the stimulus is working, and that I suspect is one of your concerns. It seems highly likely that the recession is already over. In other words, we will have suffered just three quarters of negative growth – barely above the minimum definition of a recession. Given the near disaster which struck the global banking system between September 2007 and October 2008, I would say that will be a remarkable achievement. Moreover you seem to want to have it both ways – the stimulus isn’t working – and is in danger of producing much higher inflation. It can't be both, but it can certainly be neither.
Your suggestion of cutting public spending during a recession has been tried once before. In 1980 the economy was already in recession, with a fall in GDP of 2.1% in that year. In the following year, the budget aimed to cut public sector borrowing by £3.3bn, a rather large sum in those far-off days. Interest rates had started 1981 at 15%, been cut just after the budget but by the end of that year were back up to 15%. The affects of this fiscal and monetary constraint were entirely predictable. Unemployment rose, peaking at 11.4% (harmonized definition ILO) in 1983 and remaining in double figures for the next four years. At the same time manufacturing output collapsed. It had already fallen 9.5% in 1980 and fell a further 6,7% in 1981.
In spite of this carnage, there was at least a point to the Government’s policy: the control of inflation. There is no cause for such vandalism today.
I am of course concerned by the current deficit. The question though is not whether we bring it back down, but when. As Mervyn King said, this will be entirely contingent on the state of the economy.
Young Mark
Young Mark,
Have you ever heard of ricardian equivalence?
Alice
Alice,
You should ask the 60,000 people who've taken advantage of the car scrappage scheme whether they have heard of Ricardian equivalence. I think you'll find they say it's an interesting theory for which there is very little empirical evidence – then again, maybe not.
Young Mark
@ Young Mark: I think you underestimate the depth of the hole we are in. Its very easy to throw money at a problem when you have your own printing press. Does it not make you suspicious that the PSBR is £170bn (and rising) this year, and the BoE is creating £150bn out of thin air to buy said debt? What's going to happen next year? Will they print another £200bn? QE has been designed to keep Labour in power until next June. Beyond that lies a black hole.
The markets are discounting a Tory victory, and some sense returning to fiscal policy ie you cant borrow over 10% of your GDP year on year, in peacetime, with no idea how to bridge the gap other than 'Something will turn up' If there is so much of a hint that the Tories won't get in then sterling will drop like a stone, bonds will tank, yields will rise. In other words another old fashioned Labour currency crisis. Only this time in spades, as we are so indebted that there isn't enough money in the IMF to bail us out.
Someone is going to have to take the 'hard choices' that Labour keep banging on about, and soon. Otherwise the bond market will make them for us.
@Young Mark, the book "The Death of Money" about the hyperinflation suffered by Germany (and Austria) points out that its origin was in the decision to finance the German war effort by a combination of debt and printing money.
The first stage of inflation took place under the auspices of one Karl Helfferich, State Secretary for Finance from 1915 to 1917. Before 1914, the credit policy of the Reichsbank had been governed by the Bank Law of 1875, whereby not less than one-third of the note issue had to be covered by gold and the remainder by three-month discounted bills adequately guaranteed. In August 1914 action was taken both to pay for the war and to protect the country's gold reserves. The latter objective was achieved by the simple device of suspending the redemption of Reichsbank notes in gold. The former was contrived by setting up loan banks whose funds were to be provided simply by printing them. The loan banks would give credits to business, to the Federal states, to the municipalities and to the new war corporations; and, moreover, they were to advance money for war bond subscriptions. Loan bank notes, whose denominations ranged from one to 50 marks, were to be regarded as legal tender; and those not taken up by the Reichsbank were put into immediate circulation. However, the most ominous measure for the future was the one which permitted the Reichsbank to include three-month Treasury bills in its note-coverage, so that unlimited amounts could be rediscounted against banknotes.
Printing money to buy government bonds. Now where have I heard that idea before? Oh, wait....
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