Britannia Radio

There's no doubt that Mervyn King meant business today.  What he said 
was dynamite and his timing couldn't have been more deadly.

We'll here more of this as Brown plods his red-eyed way to Rio and 
Sao Paulo and Santiago and let's watch tp see if he gets them in the 
right order!

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MAIL ON LINE Blog 24.3.09
King pulls the rug out from under Brown
Benedict Brogan

Stunned looks in the Commons a short while ago. Mervyn King dropped a 
bombshell in his evidence to the Treasury Select, namely that he 
doesn't think there is a case for another fiscal stimulus. At a 
stroke he appears to have demolished Gordon Brown's reasoning for the 
G20 summit and the Budget by saying we can't afford another injection 
into the economy. These are the key quotes:

"I'm sure the government will want to be cautious in this respect. 
There is no doubt we are facing very large fiscal deficits over the 
next 2-3 years.

"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.

"The level of the fiscal position in the UK is not one that would 
say: 'Well, why don't we just engage in another significant round of 
fiscal expansion?'"

This is a major twitch of the Governor's eyebrow. The significance of 
Mr King's statement will send shockwaves through Westminster. He has 
blown a hole in Mr Brown's political strategy.

Does the PM defy the Governor and press on regardless of the possible 
impact on the markets? Or does he run up the white flag? I gather Mr 
King has been wanting to get this off his chest for some time. I'm 
sure his motives are honourable, but I can't help recalling those 
stories - vehemently denied - about how Mr Brown kept him waiting for 
his nomination..
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BBC ONLINE 24.3.09
King warns against more spending
Mervyn King, the governor of the Bank of England, has cautioned 
against further significant government spending to stimulate the 
economy.

Given the high levels of UK debt as a result of recent stimulus 
packages, Mr King questioned the wisdom of increasing debt by 
spending more.

He did, however, say that there was room for further "targeted and 
selected measures" in some areas of the economy.

The government said there was no rift with Mr King over stimulus action.

Mr King was answering questions from MPs at a Treasury committee.

His comments came as official figures showed a surprise rise in 
consumer price inflation.
This increased to 3.2% in February, from 3% in January, led by the 
rising cost of imported goods.

'Higher deficits'
Mr King said increasing levels of debt in the face of the economic 
downturn was the right course of action.

"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 said.

"So we are going to have to accept, for the next two to three years, 
very large fiscal deficits."

But the current high level of debt means the government needs to be 
careful about further spending, Mr King argued.
"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.
"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'."

'Marked signal'
The BBC's economics editor Stephanie Flanders said the governor's 
comments came at an awkward time for Gordon Brown. [see below]

This is because the prime minister is currently touring the world 
ahead of next week's G20 summit, calling on governments to back US 
and UK plans for possible further stimulus action.

She said Mr King was sending "a very marked signal to Gordon Brown".
=-=-=-=-=-=-=-=-=  Here follows  BBC Blog------
STEPHANOMICS
Governor's pointed remarks
Stephanie Flanders | 16:36 GMT

Asked about budget policy, Mervyn King will usually politely refer 
inquiries to HM Treasury. After all, the independence of the Bank of 
England is a two-way street. Since he doesn't want ministers weighing 
in on monetary policy, he has usually shown them the courtesy of 
resisting commentary on the budget.

There have been exceptions. But none as pointed as his remarks to the 
Treasury Select Committee this morning, where he effectively said 
that the government would be mad to consider another large stimulus 
package.

Why change the habits of a decade? And why now - with Budget Day less 
than a month away?

There are two possible explanations. One is that he thinks the 
British budget is now in such a bad way that saying this is no longer 
controversial.

The other is that the governor wants to give public support to those 
in the government - notably in the Treasury - who are resisting calls 
for another fiscal stimulus on 22 April.

I suspect both are true. As I flagged up last week, the IMF now 
thinks the UK will have a deficit of 11% of GDP in 2010, compared 
with a G20 average of 6.3%. The Item Club has since produced its own 
forecast for a deficit of more than 13% in 2010-11.

The fund's figures also showed that we have had the largest swing 
into the red since 2007 of any major G20 economy. Our borrowing will 
have risen by 6% of GDP per year, on average, between 2007 and 2010.

"Given how big these deficits are", King said this morning, "I think 
it would be sensible to be cautious about going further in using 
discretionary measures to expand the size of the those deficits."

Many economists would consider that a simple statement of fact. When 
you are in a cavernous hole you think long and hard before digging a 
lot more, especially when you're a country hugely dependent on 
selling its government debt to foreigners.

Given the risks to the budget of failing to prevent a depression, 
there may come a time when the government has to contemplate another 
stimulus package. But anyone would say you'd need to tread cautiously.

Yet, clearly, Mervyn King is not just another City economist. He will 
have been well aware that this was consequential, especially with 
debates over fiscal stimulus likely to be front and centre at next 
week's G20 Summit.

And he didn't leave it there. He went on: "that's not to rule out 
targeted and selected measures... 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?"

This is more words on fiscal policy than the governor has uttered in 
a long time. At a time when the Treasury is fighting to prevent 
another big stimulus going into the Budget, it is difficult to escape 
the conclusion that Mervyn King wanted everyone to know exactly which 
side he was on.

Even the fiscal activists at No 10 are not contemplating a US-style 
fiscal package. And as the IFS has noted repeatedly, last year's 
stimulus was itself a pretty feeble affair. The vast bulk of the rise 
in UK borrowing is due to things beyond the government's control, 
particularly the impact of the recession on revenues.

King is not saying the government should seek to prevent the 
automatic stabilisers from operating. High and rising deficits are 
inevitable for at least a couple of years. Though George Osborne has 
suggested otherwise, nor is he asserting that the earlier fiscal 
stimulus was a mistake.

The governor's remarks today are consistent with what he said on that 
subject at the November inflation report press conference. At that 
time he said a fiscal stimulus would be a "perfectly reasonable" 
response to the crisis, provided that it would it be "temporary, 
purely temporary", and "that it would be clear that there was a 
medium term plan to bring tax and spending back into a sustainable 
balance over the medium term."

You could say that today's comments are merely an updated version of 
this view. You could also, as I said at the start, say that they were 
a pretty uncontroversial description of Britain's fiscal position. 
But if there are senior members of the government who think a big 
second stimulus is a live issue, they've been put on notice that the 
governor doesn't agree.
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TELEGRAPH 25.3.09
'No extra cash' for UK economy, Bank of England chief warns
Gordon Brown has little or no scope to pour extra cash into the 
stricken economy, the Bank of England Governor has said in an unusual 
intervention on the state of the public finances.
[shortened to eliminate duplicated statents in the committee -cs]

By Edmund Conway, Economics Editor

Mervyn King used an appearance at the Treasury Select Committee to 
warn the Government of the dangers of borrowing any more to bring the 
recession to an end. In comments which will increase the speculation 
that the Chancellor will not embark on an American-style economic 
bail-out at the Budget next month, Mr King said Alistair Darling must 
keep spending under control.
[- - - - - - - - - ]

The warning amounts to the Governor's most forceful language yet on 
the dangers facing the public finances. It comes only days after the 
International Monetary Fund warned that Britain is facing the biggest 
government deficit in the western world, even before it has pledged 
any extra cash to be spent on the recession.

The Fund warned that even before it has committed to extra "fiscal 
stimulus" such as tax cuts or spending increases, the Government is 
facing an unprecedented budget shortfall because the recession is 
eating into its tax revenues and increasing the amount it has to 
spend on unemployment benefits for laid-off workers. The cost of 
these so-called automatic stabilisers is likely to be even greater 
than the £20bn spent by Alistair Darling at the pre-Budget report in 
November on cutting VAT for a year.

Business lobby group the CBI warned this week that Mr Darling should 
not spend extra cash at the Budget.

However, the Prime Minister is thought to be investigating plans to 
use the Budget next month to borrow even more and boost the economy 
with a set of measures including tax cuts and spending increases. 
Some suspect his plan is to use the Budget to help boost his 
popularity ahead of the anticipated 2010 general election. With the 
G20 meeting of world leaders likely next week to recommend that 
governments do everything in their power to boost their growth, many 
claim the temptation to do so will be difficult for Mr Brown to resist.

Shadow Chancellor, George Osborne, said: "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. It is the Prime Minister 
who is now isolated at home and abroad."

After the hearing at the House of Commons, Mr King visited Buckingham 
Palace, at the Queen's invitation, for a private audience. It was the 
first such audience with a Bank of England Governor in her reign.