George Osborne declares Mervyn King's opposition to a further fiscal stimulus as a "defining moment"

The Governor of the Bank of England, Mervyn King, appeared before the Treasury Select Committee today and made comments expressing his opposition to a further fiscal stimulus.

He said:

"There is no doubt that we are facing very large fiscal deficits over the next two to three years... 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. And it doesn’t make sense to try and offset that.

"So we are going to have to accept, for the next two to three years, very large fiscal deficits. But 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. That’s not to rule out targeted and selected measures that may find those areas, whether it’s in the labour market, whether its in corporate credit, that can do some good.

"But 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. We could do more monetary easing if necessary, but monetary policy should bear the brunt of dealing with the ups and downs of the economy."

Shadow Chancellor George Osborne has responded as follows:

“This is a defining moment in the political argument on the recession. The big debate in British politics about the recession has been whether or not the country could afford a debt-funded fiscal stimulus... The Governor of the Bank of England no less has said Britain cannot afford a further fiscal stimulus. He goes on to say that monetary policy should be the main tool to tackle the recession.

”This is hugely significant, as it completely vindicates the big decision taken by David Cameron and myself on the economy, and it leaves Gordon Brown's political plans for the G20 and the Budget in tatters.”

George Osborne is right to highlight this: despite the Prime Minister's rhetoric, it is he who is increasingly isolated on this issue.

Jonathan Isaby

Comments

[Cleethorpes Rock]

Osborne is right, but would have greater credibility if he'd opposed all the other "stimulus" plans, starting off with the rescue of Northern Rock, which should have been allowed to go bust, along with a statement that no taxpayer money would be pumped into bad businesses.

The reason the banks aren't lending is because they know if they don't, they'll get more cash from the taxpayer. They know if they hold out, the government will blink first and buy all their junk assets. The banks must be laughing all the way to, well, themselves.

This could be the real turning point in sorting the problems out. Once we realise there's nothing left in the cupboard, stop printing monopoly money and get back to sound economics, we can move forward.

[Tony Makara]

Mr King is telling the government that they have no room for manouvre, but its also a warning to an incoming Conservative government that this recession has to be ridden out, it cannot be bucked through public spending or sinking our currency through dangerously low interest rates.

Perhaps Mr King is now looking to distance himself from the panic measures that the government have become mired in?

Perhaps Mr King is now saying we ought to let this storm pass and set our focus on having the right conditions in place to greet the post recessionary economy?

At the moment we are not ready for the economic upturn when it does arrive, interest rates have fallen so low that our currency has been scuppered meaning we are going to have to contend with imported inflation, with the inevitable rapid interest rate hikes as a response meaning misery for homeowners and even more problems of liquidity for business.

In spite of what the prime minister says about being well placed to ride out the recession, the truth is we couldn't be in a worse position to face a post recessionary economy.

Mr King knows that and Mr King is warning us all.

[Peter Buss]

Just a query - is King also not in effect saying that it is the wrong time to offset the automatic stabilisers increases by public sector cutbacks or am I reading his comments in the first para wrong.

Still top news in vindicating the very brave Cameron/Osbourne line in holding out against another fiscal stimulus.

[Cleethorpes Rock]

I don't see what good the "stimuli" have done so far apart from rack up a mountain of debt for the future that will hobble the economy for years to come.

Einstein said the definition of insanity was "doing the same thing again and again, expecting different results"

Based on this, I think Gordon Brown should be sectioned.

[David Sergeant]

"Still top news in vindicating the very brave Cameron/Osbourne line in holding out against another fiscal stimulus."

Posted by: Peter Buss | March 24, 2009 at 16:14

Just a note of agreement. I remember at the time feeling a bit twitchy but they were right and brave to say so. No one will pick it up though, brave and right decisions by Cameron are of no interest, the media and Tory Taliban are only interested in how long Clatk pauses before agreeing with Osborne.

[Peter Buss]

Couldn't agree more with David Sergeant. Well said !
Still nothing on the DT website - but a full report on the Guardian website !

[David Belchamber]

"Einstein said the definition of insanity was "doing the same thing again and again, expecting different results".

Good quotation, Cleethorpes Rock; it reminds me of one definition of fanaticism:
"redoubling your efforts when you have forgotten your original aims".

[TomTom]

Read This

Coup d'etat

[Victor, NW Kent]

Very interesting replies. The Tory line on this is now being followed by such as Frau Merkel who also says we must wait to see what effect the various stimuli have before launching others. That will give us time to reflect as well.

An abiding sin of New Labour, from the beginning was change for the sake of change. That resulted in a plethora of announced initiatives which were never actually implemented or were superseded within months if not weeks.

Perhaps we could make a start by reversing the ridiculous VAT cut and freeing anyone who earns under £14000 a year from Income Tax. The only measure which has been implemented was the VAT cut - all else was set aside whilst we played roulette with the banks. Sorry, there was also the totally ineffective bank rate cut to the point where savers earn no return on their cash and some people pay a penny a month on their mortgage.

[Ross Warren]

Its good news. We have a sensible and pragmatic Bank of England. I do hope we can keep the pinko's away from the champagne, after all they are on a cultural wreaking spree as well as bankrupting our nation.
Brown must not be allowed to spend us into a hole. We may as well accept the inevitable rise in unemployment and the grinding poverty that it will inflict on its victims.
We have to commit to big cuts and somewhere in all the chaos we have to find funding for a new generation of power stations. I don't see a problem in the long run as there is a massive to do list that will ensure our economics for a least a generation. Our problem is one of funding not of a lack of important projects that would generate a sustainable economy. Somehow we must find a way of getting funding for the needed improvements in our infrastructure. The good thing about this recession is that it will slow our dash for the cliffs edge. The very bad thing about this recession is that it will dislocate our already hopelessly disorganised society. Boris listen to me you old kipper, there needs to be a human element to our improvements. So lets not get over triumphant many are going to suffer before this "recession" is over.

[Andrew S]

"Osborne is right, but would have greater credibility if he'd opposed all the other "stimulus" plans, starting off with the rescue of Northern Rock, which should have been allowed to go bust"

No, it really shouldn't. How many people would have lost their deposits?

[Cleethorpes Rock]

Caveat emptor.

[Peter Botting]

Brown obviously believes in the principle of the "hair of the dog".

If you have drunk too much, stop drinking. If you have spent too much, stop spending. If you have mismanaged too much, stop mismanaging.

Watching him trumpet the next huge spending spree at the EU today was scary.

[Richard Calhoun]

All very well talking of defining moments George but when are we going to hear some 'definitive' proposals from the Tories to deal with this financial meltdown????