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Put your cheque book away Prime Minister

Yesterday, Mervyn King, Governor of the Bank of England, was answering questions from MPs at a Treasury committee. Just another routine meeting you might think. However, the governor grabbed the headlines by breaking with a convention of the Bank of not discussing the public finances in the open.

 

He basically warned Gordon Brown against mounting another significant fiscal stimulus in the next Budget. He said: “I think it’s right to accept that when the economy turns down and the automatic stabilisers kick in, so the increased benefit expenditures and lower tax revenues are bound to lead to higher fiscal deficits.” He went on to say: “There is no doubt that we are facing very large fiscal deficits over the next two to three years. I think the fiscal position in the UK is not one where we could say, well, why don’t we just engage in another significant round of fiscal expansion.”

Mr King is obviously worried that debt levels would become unsustainable and that any further increases in expenditure could affect future inflation levels. In fact, the IMF has forecast a budget deficit of 11% of GDP in 2009-2010 (see my blog of 23rd March) and only yesterday the European Commission said that Britain had until 2013-14 to bring its budget deficit back down below 3% of national income.

 

Mr King did say that there was still some room for “targeted and selected measures” for increased expenditure in some areas of the economy, but his comments did come at a difficult time for Gordon Brown who is, at this moment, jetting around the world before next week’s G20 meeting, to persuade member governments to back plans for a greater fiscal stimulus.

 

Of course, the Governor of the Bank of England has no power to cut up the Prime Minister’s credit card, but he has put a warning shot across his bows. Government spokesmen acted quickly in response to play down any rift between the Bank and the government.

 

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Posted in Bank of England, Fiscal stimulus, government borrowing, Public Finances

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