Bank of England governor Mervyn King has poured cold water on the prospects of a further spending boost to aid an ailing UK economy in next month’s Budget.
Giving evidence to the Commons Treasury Committee, Mr King warned that Chancellor |Alistair Darling would have to be “cautious”, given the state of the public finances.
His intervention came as Gordon Brown was setting out on a whirlwind diplomatic tour to rally support for a further co-ordinated “fiscal stimulus” at next month’s G20 summit.
The Prime Minister’s spokesman said: “We have been clear that we will do whatever it takes to see us through the global downturn and a crucial part of that is to ensure that we co-ordinate action globally.
“The governor of the Bank of England has a remit to look overall at the UK economy, specifically related to meeting the inflation target of 2%, and it is in that regard that he was giving evidence this morning to the select committee.”
The spokesman pointed to an article by US president Barack Obama in which he called for |“robust and sustained” action by countries around the world to stimulate their economies.
Mr King’s intervention could hardly come at a more difficult time for Mr Brown, who |addressed the European Parliament in Strasbourg today, as he seeks to persuade other countries of the need to do more to lift the global economy out of recession.
It follows reported tensions between Mr Brown and Mr Darling over the need for a further stimulus in the UK — with the Chancellor said to be notably more cautious than the Prime Minister.
In his evidence to the committee, Mr King warned that the Government needed to be wary of pushing the public finances further into the red in the wake of Mr Darling’s original £20bn stimulus package last November.
“Given how big those deficits are, I think it would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits,” he said.
Mr King did not rule out |“targeted and selected” measures on specific areas such as unemployment, which hit two million last week and could top three million by the end of the year.
But he added: “The fiscal position of the UK is not one which says ‘Let’s just go on another significant round of fiscal expansion’.”
He said interest rates cuts and the latest move to pump £75bn in newly-created money into the economy — known as “quantitative easing” — should “bear the brunt” of bringing the UK out of recession.
His caution over a second round of fiscal stimulus measures |followed a call from former Cabinet minister Stephen Byers for the Chancellor to abandon the centrepiece of his November package — the temporary cut in VAT to 15%.
Mr Byers, who originally supported the move, said in an article on the Progress website: “I do now question whether it has run its course, both in terms of its overall benefit to the economy and in relation to the political |return that comes to the Government.”
\[Susan Penman\]Shadow chancellor George Osborne said the comments of the two men were "a defining moment in the political argument on the recession", which vindicated the Conservatives’ stance and left Mr Brown isolated.
"The big debate in British politics about the recession has been whether or not the country could afford a debt-funded fiscal stimulus. When the Conservatives opposed the VAT cut last autumn, Gordon Brown said we were alone," he said.
"Today, not only has a former Labour Cabinet minister attacked the ineffective VAT cut, but the governor of the Bank of England, no less, has said Britain cannot afford a further fiscal stimulus. This is hugely significant."
Appearing later before the Lords economic affairs committee, Mr King acknowledged that the Bank’s policy of "quantitative easing" could lead to sharp rises in interest rates once the economy picked up.
He said a clear "exit route" was needed to reverse the measures adopted during the current crisis to prevent inflation taking off.
"We will have to take very seriously indeed the need to follow the exit route and to raise interest rates, for example, quickly and sharply where necessary," he said. "This is clearly an issue."
He also disclosed that the shortcomings in the legal system which led to the nationalisation of Northern Rock had been identified in "war games" involving the Bank, the Treasury and the Financial Services Authority (FSA).
"In those exercises we identified exactly the problem that arose with Northern Rock, namely that the legal framework for resolving it wasn’t there," he said.
"That is why in the end the Government had little choice but to take Northern Rock into public ownership."
FSA chairman Lord Turner, who published his proposals for reform regulatory system last week, said politicians had to resist pressure from the banks to relax any new controls that were introduced.
"You need a robust willingness to resist lobbying for it to be loosened over time. There will be pressure gradually to undo what you have in place," he said.