Britain cannot afford further tax cuts or public spending rises in next month’s Budget because of the state of government finances, Gordon Brown has been told by the Bank of England.
The warning is likely to anger the Prime Minister, who yesterday called on other countries to deliver “the biggest financial stimulus the world has ever seen”.
However, the Treasury is thought to agree privately with Mr King’s assessment that further British intervention is unaffordable.
Mr Brown is understood to be considering another multi-billion-pound fiscal stimulus package of tax cuts and spending rises in the Budget.
Mr King’s warning undermines not only Mr Brown’s plans but also the foundations of the G20 summit that the Prime Minister is hosting in London next week, since the meeting is broadly regarded as a platform for world leaders to agree to spend extra billions on averting a global depression.
Many suspect that Mr Brown will use the summit as an opportunity to present a generous package of tax breaks for savers, particularly pensioners.
These plans may be in jeopardy if the Treasury heeds the Governor’s warning.
It is rare for any leading public official — let alone the Governor of the Bank of England — to deliver such a public warning over the country’s finances in the run-up to the Budget. However, appearing before the Treasury select committee yesterday, Mr King gave warning of the dangers of borrowing any more.
“I’m sure the Government will want to be cautious in this respect,” Mr King said. “There is no doubt we are facing very large fiscal deficits over the next two to three 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?’ ”
Immediately after the hearing at the House of Commons, Mr King was invited to Buckingham Palace for a private audience with the Queen. The meeting, at Her Majesty’s request, represented the first time she has met the incumbent Bank Governor.
Following Mr King’s comments, No 10 aides insisted that a further fiscal stimulus package was still on the agenda and had not been ruled out. An official said the Government would do “whatever it takes to create the growth and jobs we need”.
Yesterday, in a speech to the European Parliament just hours after Mr King’s appearance before MPs, the Prime Minister called on countries attending the G20 summit to borrow and spend unprecedented amounts.
He said: “We can together deliver the biggest financial stimulus the world has ever seen, the biggest cut in interest rates, the biggest reform of the international financial system, the first international principles governing banking remuneration, the first comprehensive action against tax havens and for the first time in a world crisis, new help for the poor.”
There are growing fears that the Government may be over-extending the public finances in response to the recession.
Some fear the combined cost of banking bail-outs alongside economic measures could cause Britain to lose its top-level credit rating, raising the prospect of having to call on the International Monetary Fund (IMF) for help.
Alistair Darling, the Chancellor, announced a £20 billion fiscal stimulus package last year. However, this included a cut in VAT which many retailers have indicated is not boosting the economy.
Stephen Byers, the former cabinet minister, called on Mr Brown yesterday to ditch the VAT cut, questioning “whether it has run its course”.
The Conservatives are already being forced to scale back their tax-cutting plans. They have also urged Mr Brown to show restraint.
George Osborne, the shadow chancellor, 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.”
The IMF has 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. It said the shortfall in its books will hit a record 11 per cent of gross domestic product — some £150 billion — next year, far greater than any other Western nation.
Vince Cable, the Liberal Democrat Treasury spokesman, said: “The Government has lost all credibility when it comes to fiscal stimuli since it wasted £12.5 billion on an ineffective temporary VAT cut.”
Mr Brown was yesterday embarking on a global diplomatic mission to garner support ahead of next week’s summit at the ExCel centre in London.
In a speech to the European Parliament, the Prime Minister said that Europe was “uniquely placed” to lead international negotiations on solving the economic crisis a
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