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Is the Bank blaming Gordon Brown?
September 19, 2008
Here is Chris Giles‘ shrewd take on the Bank’s analysis of the dramatic fall in sterling. The MPC came to no conclusion over the cause, but it certainly did not rule out chronic indecision at the heart of government.
An increasing number of economists think sterling’s decline represents a global lack of confidence in Britain and its paralysed policymakers rather than a beneficial move to changed economic or interest rate expectations.
Recognising that the extent of sterling’s fall could not easily be explained, the Bank’s monetary policy committee discussed the phenomenon at its September meeting. Members accepted that it was likely to be either because of a “net shift in global demand away from UK producers” or “perhaps because of a rise in the relative uncertainty about short-term macroeconomic prospects or about policymakers’ likely responses”. Perhaps fittingly, the committee could not decide which.
His upsum of the economic pressures bearing down on ministers is well worth a read, although it is not for the faint hearted. Will Gordon Brown and Alistair Darling rise to the challenge?
For ministers the choice is horrible. They can try to muddle through, insisting the slowdown is just cyclical, so in time the economy and public finances will recover. That might seem the easy option, but it risks appearing out of touch and could further undermine international confidence in the UK and sterling. Mr King fired a shot across ministers’ bows last week. The long-term risk, he said, was that a failure of public finances to add up “undermines the market’s belief in the credibility of both the monetary and the fiscal frameworks. That will make our life more difficult.”
Alternatively, Mr Darling could accept that the economy and public finances will be persistently weaker than thought and seek to repair the damage with a programme of spending restraint and tax increases. If so, it would be a repeat of the two swingeing Budgets of 1993, which saw big rises in taxes and duties. These helped reverse a spiral of government debt. But they also helped seal the fate of the then Conservative government.
