Mervyn King yesterday announced that he would give his explicit approval to this Tory-led Government to break one of its most important rules – a rule that Labour has consistenly said was impossible and unfair given the Government’s kamakazi economic policy. Yesterday Mervyn King gave the green light to the Government not to cut the deficit by 2015.
By placing himself so close to the Government, Mervyn King has set a precedent that not only fundamentally changes the nature of the relationship between the Government and the Bank of England, but one which has single-handedly undermined the independence of the Bank and the ability of future governors to act independently of Westminster.
However, more importantly, Mervyn in many ways is helping the Government at its own game of deception. Its economic policy of cutting far and fast has failed as tax receipts have plummeted and unemployment has soared. They are at the core of their own failure to deal with the deficit.
We should be very clear: Osborne’s plan has failed and our deficit, far from being smaller, is the biggest it has ever been at £14.41bn in August.
Indeed thirteen of the economists who wrote in support of Osborne in 2010 have now turned their backs. As the economy continues its dip into the biggest double dip recession since the war and our GDP is still 4.5% lower than its 2008 peak, there can be no doubt that George Osborne must change his fiscal rule on debt unless he wants to drive Austerity Britain into a deeper crisis. Jonathan Portes of the NIESR, has recently written:
“In the short term, there is plenty that can be done to help the UK economy. The main thing holding back growth in the UK is bad policy.”
Will King support the Chancellor who has mooted a benefits freeze for those he has put on the unemployment pile – adding to the housing benefit cap and other policies that has pushed the number of people in temporary housing up 26% and the number of businesses failing to 68 a day since this government took office. At the same time as the Tory-led coalition is forcing Britain back to the social divisions of the 1980’s and the poverty of the 1930’s, Labour is offering a message of hope and is offering a real alternative.
To their great credit, Ed Balls and Rachel Reeves have continued to call for government action to stimulate demand, with just marginal effects on borrowing. Bringing forward long-term investment plans, building 25,000 new and affordable homes, lowering tax for small businesses and for families. These policies, far from trying to rely on the turbulent markets for recovery, show that Labour understands that confidence in the markets comes from supportive Government policies, rather than policies that stymy growth. It is these policies that will ultimately lower the deficit. On the plan for a temporary cut in National Insurance, Portes says:
“A temporary cut in National Insurance Contributions for both employers and low-paid employees would boost labour and consumer demand at the same time as improving work incentives.”
With up to two and a half years before the next election, voters now have a clear choice. On the one hand we have a party, supported by a politicized governor of the Bank of England whose response to the continuing crisis has been to push unemployment up to 2.59 million, trying to cut the deficit through cutting public investment in schools, roads, and hospitals.
I think that when we consider what Mr King has to say, we should note the warnings that Labour and former members of the MPC, like David Blanchflower and Adam Posen, have consistently given. We should bare in mind that an economic policy that is based on blindly cutting deficit is self-defeating unless it can boost demand, boost business and boost its credibility by supporting everyone in society not just the one percent.