The charge against Gordon Brown is that his promise of future investment - instead of cuts - is cloud cuckoo land given the grim public finances. You may think this unfair.

But here is the verdict of the governor of the Bank of England today when asked about the national deficit:

Mervyn King:

“The speed of which the fiscal stimulus should be withdrawn has to depend on the state of the economy. …The scale of the deficit is truly extraordinary. 12.5 percent of GDP is not something that anybody would have anticipated even a year or two ago. And this reflects the scale of the global downturn.

But it also reflects the fact that we came into this crisis with fiscal policy itself on a path that wasn’t itself sustainable and a correction was needed.

There will certainly need to be a plan for the lifetime of the next parliament, contingent on the state of the economy, to show how those deficits will be brought down if the economy recovers to reach levels of deficits below those which were shown in the budget figures.”

As David Cameron points out, there is an admission on page 200 of the Budget red book: “The current downturn is forecast to be much deeper than that of the early 1990s.”

Doesn’t this make a nonsense of Gordon Brown’s constant claim that things were much worse in the early 1990s when interest rates and inflation were in the double-digits?

We predicted in October that the government could suffer an uncovered gilt auction within months because it was trying to raise such a vast amount of money from the bond markets.

From Bloomberg a few minutes ago:

UK government bonds slumped, extending three days of losses, after an auction of 40-year gilts failed to meet the amount of debt the Treasury offered. Investors bid for 1.63 billion pounds ($2.4 billion) of
notes, lower than the 1.75 billion pounds of 4.25 percent notes the Treasury had slated to sell, the UK Debt Management Office said today.

“Basically it’s the first failed auction,” said John Wraith, head of sterling interest-rate strategy at RBC Capital Markets in London. “They didn’t receive enough to cover it all so the market’s obviously sold off extremely heavily.”

UK bonds fell, pushing the yield on the 10-year gilt 10 basis points higher to 3.43 percent by 11:02 a.m. in London.

It may be too early to gauge how bad this is for the government. The man in charge of gilt issuance told MPs last year there had been no uncovered auctions for seven years; but one wouldn’t be the end of the world. A “series” of uncovered auctions would be much more disturbing.

The news will add to the discomfort following Mervyn King’s warning yesterday on another fiscal stimulus package in the Budget.

Steven Major, head of global fixed income research at HSBC, said: “The bond markets are increasingly worried about the large amounts of debt the UK is taking on, while poor inflation numbers added to worries about the economy.”

UPDATE

A fresh gilt auction on Thursday has gone well, easily covered by investors - proving that one swallow doesn’t make a summer, etc. Attention will still be focused on the next round of auctions, however.

Jean-Claude Trichet, president of the European Central Bank, warned on Monday that governments should stop concocting new stimulus measures and just get on with the ones they’ve already announced.

And now Mervyn King (pictured) has weighed in with comments which will not be welcomed fulsomely in 10 Downing Street.

King, governor of the Bank of England, made what can only be described as a surprise intervention this morning when he told MPs the recession was ”bound to lead to higher fiscal deficits and it doesn’t make sense to try to offset that”.

He told the Treasury select committee: ”We are going to have to accept for the next two or three years very large fiscal deficits. Given how big those deficits are, I think it is sensible to be cautious about going further in using discretionary measures to expand those deficits.”

This is music to the ears of the Tory party, whose initial caution towards fiscal stimuli - late last year - made them look temporarily isolated.

My colleague Chris Giles (FT economics editor) notes that King is “sailing very close to the constitutional line in providing advice to government.”

UPDATE

10 Downing Street hit back this afternoon by citing Barack Obama’s call for other nations to help “jump start” the global economy. BO writes in today’s International Herald Tribune calling for other G20 partners to take actions to “amplify” the actions of the US.

Last autumn we were reminded again and again that the economic picture wasn’t totally bleak - because there were still plenty of job vacancies. The figure of 600,000 was touted in the Commons on several occasions in October - including Prime Minister’s Questions.

How come ministers are no longer using this argument? Figures from the ONS show that in January there were only 420,000 vacancies left. Since then the number is likely to have shrivelled further.

The heaviest snow to hit the Washington area for years has disrupted Gordon Brown’s hopes for a statesmanlike press conference with Barack Obama in the White House Rose Garden, which is now better suited to building snowmen.

The Brown and Obama camp are trying to arrange a separate “press opportunity” in the Oval Office, which - as one British official put it - will leave the prime minister without “flags and podiums” when he appears on the television news.

I’m not sure if pictures of the two of them chatting cosily in the Oval Office would not work better for a prime minister who is anxious to prove the “specialness” of the relationship between Britain and the US. Incidentally that relationship is now called “a partnership” in the White House - a term which perhaps suggests less long-term emotional commitment?

The formal talks with Mr Brown are scheduled for a paltry 30 minutes, less than Mr Obama appears to be setting aside for his meeting with the Boy Scouts of America this afternoon. But this is slightly unfair on Mr Brown  - a lot of the real business will be done over a working lunch at the White House.

Officially Mr Brown wants Mr Obama to engage in planning for the G20 summit in London in April. But some nice pictures, a good atmosphere and - crucially - some Obama endorsement of his economic policies will be far more important in terms of domestic politics.

George Parker is the FT’s political editor

The Foreign Office finances are dire. Its small budget has been hit hard by the collapse in sterling. The consequences are slowly beginning to emerge. As we reported today, Britain is set to withdraw the vast majority of the police seconded to EU reconstruction missions around the world. That will put the UK’s contribution to civilian operations in hotspots like Afghanistan, Georgia, Palestine on a par with Slovakia’s. So much for being a big player in Europe.

These kind of reconstruction and conflict prevention missions were a top UK priority. Gordon Brown even pledged last year to muster a 1,000 strong standing force of civilian volunteers. That now seems like a pipedream: the UK can no longer even afford its existing deployment of 100 police.

How did it come to this? One problem is how the FCO has managed its currency exposure.

Last year the Treasury removed the protection it gave the department against falls in the pound. (Very generous.) As a result, the FCO mandarins decided to hedge, telling MPs that “the ‘do nothing’ option is itself speculative and potentially high risk”.

But, for whatever reason, the FCO failed to cover itself beyond October 2009. So by the autumn, if the pound is still in the doldrums, the department will see its purchasing power slashed. You have to ask why it did not protect itself for longer — its budget, after all, is settled over a three year period. Other departments are facing pressure from the Treasury to cut costs and make savings. The FCO, somehow, seems to have put a squeeze on itself.

Was this a self-inflicted blow? I’m not sure. The Treasury may have stopped the FCO from hedging for more than a year. If this is true, the Treasury should cover the costs. But if this is a matter of the FCO being too timid, the mandarins will have some explaining to do. If the pound fails to recover by October, embassies around the world will see their expected budgets cut by up to a quarter.

The FCO board is now in a real pickle. Does it hedge to protect against the pound falling further in 2009/10? Or does it bet against the Euro and the Dollar by going into next year unprotected?

Gordon Brown used to boast that Britain was “better prepared” than other countries to ride out the economic storm. Britain’s diplomats now have to decide whether to bet their budget on whether the prime minister was right.

There is a certain irony to David Freud’s defection. When he first unveiled his plan to massively expand the role of private providers in finding work for the jobless, the ideas were compelling but largely ignored by politicians. He now joins the Tory frontbench at a time when his welfare plans are as popular in Westminster as apple pie. But his ideas, out in the real world, are facing their first real test.

The early evidence from Freud-style welfare programmes suggest the reforms are harder and more expensive to implement than first envisaged. Freud designed them in the good times, when credit was easy and jobs were aplenty. The core ideas are still sound. But neither Labour nor the Tories have really come to terms with how they will need to be changed to cope with a severe recession and credit crunch.

The Tories already have a welfare plan. It is basically the Freud report, with some heroic extrapolations of savings (which are used to pay for tax-cutting “aspirations”) and some added tough talk on making the workshy toil for their dole. The question is whether Freud the frontbencher will have to rewrite the Tory plan to address these problems:

1) Finding jobs for people on sickness benefit is hard and expensive

The Tories hoped to save at least £3bn a year by finding jobs for the 2.6m strong army of incapacity benefit (IB) claimants. But the latest evidence from the Freud inspired Pathways scheme casts serious doubt on this. Private providers, paid by results, are failing to reach 25 per cent of their targets - and that was before the big rise in unemployment. This is exactly the type of scheme the Tories want to rollout to all IB claimants, not just a minority.

We knew very little about people on IB. Providers are not encouraged by what they are finding out. The contracts presumed a jobseeker would need 3 or 4 months support before finding work. Officials now estimate they need double that, at best. To make the task even harder, for the next few years IB claimants will be competing against thousands of people who have just been made unemployed. Tory insiders say they would increase the price paid to providers for finding someone a job. But savings of £3bn a year? Think again.

2) Private providers will struggle to raise money

The Tories said generating these savings would be cost-free because private providers would be paid by results. If a provider fails to find a benefit claimant work, they receive no payment for the time they have invested trying.

This effectively passes all the risk of welfare programmes to the private sector. Fine. But will these companies be able to raise the money to invest and take on that risk? No provider is making money on Pathways and some are on the verge of handing back their contracts. On these results, some providers doubt they could convince banks to back them, even if credit was flowing. They argue that for the model to work, there needs to be a bigger upfront payment from government. (Providers have demanded similar changes to programme for the long term unemployed.)

Bottom line: the programmes could be costly in the short term. Will the Tories make that investment?

3) Running bootcamps is not cheap or easy

The Tories are going to make anyone claiming unemployment benefit for two of the last three years “work for their dole”. This mandatory labour sounded like a good idea when the unemployment queues were relatively small. But by the time the Tories come to power, the list of candidates for the bootcamps could easily approach 1m or more. Even at Tory cost-estimates of up to £1,500 a head, the bootcamps are quite pricey. The cost could top £1.5bn.

And how will this be sold to the hundreds of thousands of people who tried and failed to find a job during the most severe recession in at least a generation? Coralling a mix of drug addicts, feckless layabouts and genuine jobseekers into these programmes will be fraught with difficulties. What exactly will they do? And will the Tories invest in an infrastructure to cope with them?