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Mervyn King treading too close to political lines

Posted on 26 January 2011 | 10:01am

Bank of England Governor Mervyn King is straying perilously close to political territory these days. It is one thing to make statements aimed at helping the Bank fulfil its remit of meeting an inflation target – something it is currently failing to do. It is quite another to chime in behind the Tory government’s ‘no alternative’ defence of cuts, wage restraint and general misery.

The status of the Bank is crucial to economic stability and reputation. The status of the Governor is crucial to the status of the Bank. One of the bits from my latest volume of diaries picked out by The Guardian was Mrs Thatcher giving TB a lecture on how she felt Gordon Brown as Chancellor was not showing enough respect to then Governor Eddie George. That respect has to cross parties and it has to cover as wide a business and public canvas as it can.

Governors always have to tread very careful lines. Mervyn King could do with retracing a few steps. He should also be very wary about sending such stern messages to the public about their fall in living standards being a neccessary evil, when one of the principal causes of it, the bankers he knows so well, appear to be carrying on as if nothing has happened.

Yesterday’s growth figures, George Osborne’s hopeless response – snow indeed … he must have it on the brain after his Christmas holiday – the collapse in Vince Cable’s credibility, and Ed Balls’ arrival as shadow chancellor are all combining to allow us to revisit the economic arguments of the last election and everything that has happened since.

The economy is always a political issue. But Bank independence took some of the politics out of economics. Mervyn King should endeavour to keep it that way.

  • Anonymous

    King was noticeably political and anti-Labour before the 2010 election. He is tarnished goods.

  • Chris lancashire

    Do you have to be reminded that Mervyn King was a Labour appointment and could it be that he is merely voicing an independent opinion of what he, as a central banker, thinks is the best route out of this mess?

  • “He should also be very wary about sending such stern messages to the public about their fall in living standards being a neccessary evil, when one of the principal causes of it, the bankers he knows so well, appear to be carrying on as if nothing has happened.”

    The bankers got bailed for creating the house price bubble we’re currently in. That’s pretty easy to see why they are all smiling it again. Their risks DID pay off. The coalition are keeping it going. People have mentioned that Labour and Conservatives are now choices again. They are not. Who’s going to burst this house price bubble that the banks relied on? Neither of them are. House owners, mortgage equity releasers, landlords and where they spent their short term profits, the public sector that grew on the expectation it would continue, all benefited in the short term and continue to as interest rates are kept low. It was a credit feast, and here comes the hangover that Labour and Conservatives are trying to delay.

    The fall in living standards in coming. The public let the government and banks get away with it as many naively rode the bubble upwards too.

  • The Bank was made independent in 97, not neutral.

  • The bank was made independent in 97, not neutral.

  • Olli Issakainen

    I hope no one has believed the Treasury spin that it is all down to “weather”. C4´s FactCheck blog tells the truth about this. British Weather Services, a meteorological company, has also dismissed these excuses.
    The truth is that Britain´s economy is heading in wrong direction because people are adjusting to forthcoming oversized cuts. Rising prices have also been an issue.
    UK growth was 1.1% in the second quarter, 0.7% third quarter and flat in fourth if “weather” is not taken into account. So there is a trend here. And all this before the unfair VAT rise and ideological cuts causing economic damage and social costs.
    The Tory-led government does not have a growth strategy because they believe that government´s job is only to keep inflation and interest rates low and leave the rest to the private sector. But without growth the cuts will only harm the economy and make deficit reduction more difficult.
    Because of inflation real incomes will be squeezed this year.
    Government´s reduction in borrowing was driven by slowdown in government investment. The current budget deficit actually rose to £13.5bn in December from £12.8bn a year earlier!
    Between April and December last year net investment shrank by almost £6bn while current spending increased by £2.5bn. Richard Lambert said that he could see little action by ministers to restrict Whitehall spending while schemes to support business have failed to materialise.
    It is dangerous policy for government to meet its fiscal objective by slashing investment. The Treasury should focus on increasing productivity.
    The truth is that Britain´s economy is not recovering. Manufacturing is relying on a declining exchange rate, but accounts only for 12% of the economy. Services (70%) and construction are down.
    The Tory-led government cannot now print money or cut interest rates. As Sir Gus O´Donnell has said, a Plan B is needed. But George Osborne is afraid of the markets, and will not go for an alternative plan until catastrophe has struck.
    But Mr Osborne should make U-turn now, and not wait for an another Black Wednesday. Government´s economic policy is collapsing, and some Lib Dems are noticing.
    Business investment will not be able to replace consumer and public spending. Banks are not lending enough. Shrinking growth and rising unemployment are ahead. And double-dip recession.
    Rachel Reeves says that we need to restructure and rebalance economy. We need a greener, fairer and more sustainable economy. Public sector cuts before the economy is out of danger zone will only prolong, not accelerate the recovery.
    Political weather in Britain has changed. Voters will listen to Labour again. And if (and when) Britain enters recession again, the Tory-led government can no longer claim that the nation´s economy was derailed because there were “leaves on the rails”.

  • Anna

    The French also had weather but the Banque de France expects, GDP growth of around 0.6%. The Germans, who also had weather, er, the same.

    Did we have the wrong sort of weather, George? Oops, sorry, you were in Klosters.

  • Nicky

    Mervyn King seems to have been a major influence on Nick Clegg post the election.

    Before the election (1st May), a LibDem website noted that

    The Lib Dems agree that cuts should be delayed. But Clegg denied this indicated political support for Labour and made clear his disagreement with Conservative policy. “Us siding with Labour? It’s siding with common sense,” he [Clegg] said. “My eight-year-old (son) ought to be able to work this out — you shouldn’t start slamming on the brakes when the economy is barely growing.

    “If you do that you create more joblessness, you create heavier costs on the state, the deficit goes up even further and the pain with dealing with it is even greater. So it is completely irrational.”

    So … exactly what did Mervyn King say or do to Clegg, to suddenly make him less intelligent than his 8 year old?

  • zamba1

    …..and Balls isn´t?

  • Marcus Cotswell

    You may have noticed that the French and the Germans are also making sharp cuts in public expenditure. So cuts per se can’t be making the difference either. If we’re going further and faster than France or Germany (and I’m afraid I simply don’t know whether that is the case), it is only because the scale of our deficit has made that necessary. Now, remind me, why is it that our deficit is so much worse than theirs?

  • Anonymous

    Balls is a politician, he’s allowed to be party political. King is a civil servant, he should not be sen to support any party directly.

  • Having listened to his speach, Mervyn King who holds the reins as custodian of the Bank of England,s independence appears to have deliberately entered the political arena in support of conservative economic strategy. I believe such a calculated move on his part calls into question his credibility as someone who would profess to be independent and Alistair Campbell is absolutely right in drawing attention to it. In addition I am of the opinion that this is not the only incidence of such political bias on Mr. Kings part and one needs to look no further than his statements in the run up to the last election. What I find frustrating is that it would appear that he can act in such a way without sanction.

  • Anna

    ‘The deficit increased because of the credit crunch and falls in the stock market and housing market rather than budget decisions. Labour entered the recession with a structural budget deficit similar to the one inherited from the Conservatives but with a smaller underlying debt’….That’s not me, it’s the Institute for Fiscal Studies. When Labour left office, the economy was growing and the deficit came in at £10 billion below the forecast.

  • mervyn king is so desperate to keep his job, especially after all that wikileaks stuff about him saying osborne and cameron were too shallow (which i agreed with) so i suppose he has to back up the government sometimes, he also has to warn the public about their economic future, however we sensible informed people know that he is wrong in saying that their is no alternative because their is, because the governement is taking an extreme approach instead of the sensible moderate one of halving the deficit within 4 years, and he should have also pointed out that peoples living standards will fall ‘because’ of real sluggish (which these cuts will create) growth which will have an impact on wage increases or rather lack of, and he also should of warned people more about the impact on unemployment these tory ideological cuts are going to have, also regarding yesterdays response to the 0.5% decrease in growth, george osbornes response was appaling, blaming it on the weather alone is embarassing note: (david cameron played it down today), but ed balls was on tv talking sense and quoting facts and figures showing that he has knowledge on the economy unlike boy george, which strengthens the fact that the tories are hypocritical by critisising ed miliband for picking ed balls as second choice, because the tories have the wrong chancellor in place, ken clarke should have been their chancellor and the tories will eventually in time like we all will, pay the price for having george osborne at number 11.

  • Sarah Dodds

    Yes – I know it’s peanuts compared to many a bank bosses salary, and yes, I know he pays his tax, and yes I know he does not get any bonuses, and yes I know he refused a pay rise; BUT if I was on King’s £300,000 + salary right now I would not be so worried.
    It is easy to say the medicine is fine if you don’t have to take it.

  • i agree with everything written in your blog alastair, it was clear that mervyn king was speaking as a conservative yesterday, i also suspected a hint of dog whistle politics in his alarmist speech, but what he should have said to all his points is that it is being done because the cuts go too far and too fast, and that because of the extreme approach to cutting the deficit growth will be very sluggish, and that that is the reason why peoples living standards will be decreasing, and that if the government took the more sensible moderate approach which is ‘halving’ the deficit in 4 years then their living standards would not decline near as much, and also his belief that their isnt an alternative is a very sudden one, because he didnt publicly disagree with alastair darlings plan to ‘halve’ the deficit a year or so ago, which reafirms my belief that he is trying to suck up to the tories, especially after his remarks about george osborne and david cameron being too shallow (which i agreed with) being released on wikileaks, and also regarding yesterdays response about the economy detracting by 0.5%, george osbornes response was pathetic, blaming it on the weather is such a pathetic response and of course untrue, note :(david cameron played it down today) however ed balls was on top form quoting facts and figures and showing he has great economic knowledge unlike boy george, the only bad judgement made about choosing chancellors or shadow chancellors, is by david cameron in choosing george osborne over ken clarke.

  • Quinney

    Watched Newsnight last night.If Justine Greening is the best the Tories have to offer on the economy then we are in trouble. The only thing she could cling on to was manufacturing was doing well. When ever have the Tories under stood manufacturing, apart from closing large numbers of factories in the 80s?

  • Janete

    Good example of Nick Clegg’s dishonesty. Mervin King is on record saying he did not say anything privately to Clegg that wasn’t already in the public domain at the time.

    Trawling through other Government ministers’ statements from the past reveals similar deceit. I’m sure we are all sick of hearing Osborne’s allegation that Labour overspent before the crash. He’s conveniently forgotten that he supported Labour’s plans at the time. On 3rd September 2007 the BBC reported:

    ‘A Conservative government would match Labour’s projected public spending totals for the next three years, shadow chancellor George Osborne has said. He pledged two years of 2% increases.’

    The article quotes Osborne as saying “The result of adopting these spending totals is that under a Conservative government there will be real increases in spending on public services, year after year. The charge from our opponents that we will cut services becomes transparently false.”

    If Labour were overspending at the time, why on earth did he support their plans?

  • Steve Brundish

    Because the financial sector makes up about 66% of GDP compared with approx 50% in Germany. Remember the opposition fully supported the government spending levels. Even if the banks had not crashed its clear the phase of capital investment that was required to rebuild the public services was coming to an end. The reduction in this area of spending would have easily brought the public spending levels back in line with the long term average. The problem was the banking collapse turning a debt mole hill into a mountain.

  • she looked and sounded like a real novice sat next to alastair darling and nigel lawson, especially alastair darling who we all know is a really good economist with a sensible approach to finances and against the wreckless slash and burn approach taken by the tory led government, ive said it before and ill say it again, what a shame most people only realised what a good chancellor alastair darling really was AFTER the election

  • Anonymous


  • Elison

    An article by award winning economist Paul Krugman in the New York Times. A collectors item this one.

    Op-Ed Columnist

    British Fashion Victims

    Published: October 21, 2010
    In the spring of 2010, fiscal austerity became fashionable. I use the term advisedly: the sudden consensus among Very Serious People that everyone must balance budgets now now now wasn’t based on any kind of careful analysis. It was more like a fad, something everyone professed to believe because that was what the in-crowd was saying.

    And it’s a fad that has been fading lately, as evidence has accumulated that the lessons of the past remain relevant, that trying to balance budgets in the face of high unemployment and falling inflation is still a really bad idea. Most notably, the confidence fairy has been exposed as a myth. There have been widespread claims that deficit-cutting actually reduces unemployment because it reassures consumers and businesses; but multiple studies of historical record, including one by the International Monetary Fund, have shown that this claim has no basis in reality.

    No widespread fad ever passes, however, without leaving some fashion victims in its wake. In this case, the victims are the people of Britain, who have the misfortune to be ruled by a government that took office at the height of the austerity fad and won’t admit that it was wrong.

    Britain, like America, is suffering from the aftermath of a housing and debt bubble. Its problems are compounded by London’s role as an international financial center: Britain came to rely too much on profits from wheeling and dealing to drive its economy — and on financial-industry tax payments to pay for government programs.

    Over-reliance on the financial industry largely explains why Britain, which came into the crisis with relatively low public debt, has seen its budget deficit soar to 11 percent of G.D.P. — slightly worse than the U.S. deficit. And there’s no question that Britain will eventually need to balance its books with spending cuts and tax increases.

    The operative word here should, however, be “eventually.” Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. Right now, interest rates in Britain, as in America, are already very low, with little room to fall further. The sensible thing, then, is to devise a plan for putting the nation’s fiscal house in order, while waiting until a solid economic recovery is under way before wielding the ax.

    But trendy fashion, almost by definition, isn’t sensible — and the British government seems determined to ignore the lessons of history.

    Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

    The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.

    Why is the British government doing this? The real reason has a lot to do with ideology: the Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative.

    Indeed, there has been a noticeable change in the rhetoric of the government of Prime Minister David Cameron over the past few weeks — a shift from hope to fear. In his speech announcing the budget plan, George Osborne, the chancellor of the Exchequer, seemed to have given up on the confidence fairy — that is, on claims that the plan would have positive effects on employment and growth.

    Instead, it was all about the apocalypse looming if Britain failed to go down this route. Never mind that British debt as a percentage of national income is actually below its historical average; never mind that British interest rates stayed low even as the nation’s budget deficit soared, reflecting the belief of investors that the country can and will get its finances under control. Britain, declared Mr. Osborne, was on the “brink of bankruptcy.”

    What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.