Remember that Mervyn King, the Bank of England governor, believes the current UK government’s plans for budgetary consolidation are not credible. “The longer there is not a credible plan that sets out what actions will be taken the more [a credit ratings downgrade] is a risk,” he told the Treasury Select Committee last month.
At the March Budget, the Treasury was planning to eliminate about half its estimated structural deficit by 2013-14. But bequeathing a structural deficit of 4.5 per cent of national income at the end of the next Parliament was not bold enough for the Bank governor. How much more deficit reduction does Mr King think is needed for the safe operation of monetary policy?
“There must be elimination in large part of the structural deficit over, say, the lifetime of a parliament which is the period for which a government is elected.”
A lot more, in other words. But we all must remember what a mess the public finances are in so there is still quite a danger of undermining growth in extremely rapid tightening. As the chart shows, timid as Alistair Darling may be in the governor’s eyes, he is a lion on public spending compared with those mice who oversaw the fiscal consolidations of the 1970s, 1980s and 1990s (the International Monetary Fund, Margaret Thatcher and John Major respectively). But while the total spending remains high, projected growth rates are tiny. Never before in modern history has Britain experienced the sustained public spending squeeze as is planned for 2011 onwards.
Perhaps Mr King wishes the British could be a little more Irish. As Kevin Daly of Goldman Sachs points out in a note today, the Irish government is expected tomorrow to tighten fiscal policy by 2.5 per cent of national income on top of the 5 per cent tightening already in place. The (Irish) Daly says:
“While the progression from European outperformer to underperformer has been sudden, the Irish government (and the Irish public more generally) have been quick to come to terms with the severity of the crisis, and have displayed considerable resolve in implementing painful changes to address the problems.”
The UK, rest of the eurozone and the US are far from being on the same page as the Irish – yet.