King seeks to stop stimulus

We can't afford any more fiscal stimulation in the budget next month, the Governor of the Bank of England has warned.

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Last Updated: 31 Aug 2010

It’s not often that we are faced with the prospect of an over-stimulating budget, but Mervyn King apparently thinks it’s a real possibility this time around. Taking advantage of the fact that Gordon Brown is out of the country for a few days drumming up support for his plans ahead of next week’s G20, King issued his outspoken warning.

Speaking in front of the Treasury Select Committee, King highlighted the size of the existing deficit and counselled ‘caution about going further in using discretionary measures to expand the size of those deficits'.

Now while that might not sound particularly controversial to most of us, by the standards of the ultra-conservative lexicon of the central banker’s public statements it is pretty explosive stuff.  King is effectively putting a warning shot across the bows of the Prime Minister, letting the whole world know that if Brown does decide to go ahead with more big-ticket financial support measures it will be against the wishes of the Bank. Although King did allow a bit of wriggle room, adding that ‘targeted and selected measures’ could be OK.

All good knockabout stuff, and it’s only right that the Governor of the Bank should be able to remind us all of his independence, especially at such a critical time. But his words say at least as much about the state of the relationship between the Bank and Downing Street as they do about the state of the national finances. Tension between the two – especially with a recession to manage on the one hand, and an election campaign to fight on the other – are bound to run high. But things have come to a pretty poor state when our famously reticent central banker breaks his unwritten rule not to talk about public finances in public.

King is apparently concerned that, since the abandonment of the famous fiscal rules governing debt and borrowing by the government last year, prudence has gone out of the window and the limits of state expenditure have become increasingly vague. A concern with which it is hard to disagree, even if you do believe that the vast sums poured into rescue and support packages so far have been necessary interventions.

What’s more, it seems that Chancellor Alistair Darling and his colleagues at the Treasury may also share King’s views. Darling has suggested that he thinks the already announced packages need a chance to take hold before any more money can usefully be thrown at the problem.

All of which leaves Gordon in a bit of a pickle ahead of the G20 next week. It could be seriously embarrassing for him if he does manage to persuade the rest of the world to follow his lead, only to find his own hands are tied when gets back home.

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