Mervyn King, the governor of the Bank of England, is giving a speech tonight at Exeter University. King, as you would expect, avoids getting into politics. But one passage is attracting interest in Conservative circles:
“Of course, there is a perfectly sensible debate about the appropriate timing of the withdrawal of the temporary fiscal stimulus as the economy recovers. Some has in fact already been withdrawn with the return of the standard rate of VAT to 17.5% at the beginning of the month. But uncertainty about how and when fiscal policy will respond has a direct bearing on monetary policy. And markets can be unforgiving. As Federal Reserve Chairman Bernanke said recently about the similar fiscal position in the United States, “near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth”. The Chancellor has made clear that the Spring Budget provides the opportunity to do precisely that.”
Reading between the lines, it is clear that King is saying that the spring Budget can’t be any kind of pre-election give away. He is also putting himself firmly in the camp of those who argue that there needs to be greater clarity about how the government actually plans to reduce the deficit. The grip of the restraining influences on Brown just got a little bit tighter.
Update: Sure enough, George Osborne has run with the King quote. In a statement released by his office, he says:
"This is a very important warning from the Governor of the Bank of England, spelling out the consequences for this country of not having a credible plan to deal with the budget deficit. I agree with him.
"Sadly this divided Government failed to provide a credible plan in the Pre-Budget report."