U.K. Deficit Cuts May Need to Slow, Ex-BOE Officials Say
“If the growth rate turns out to be lower than the government expected, then I think that they should accept that, and accept that that means that the deficit is going to be reduced in a longer time period,” former Bank of England Deputy Governor Howard Davies told Sky News yesterday. “I think that the markets will understand that.”
Osborne’s deficit-reduction program will ax 700,000 government jobs by 2017 as he pushes through the deepest cuts since World War II on a country struggling to recover from the financial crisis. Britain’s economy has succumbed to its first double-dip recession since the 1970s, and may have shrunk in the first quarter by more than the 0.2 percent initially estimated because of a slump in construction.
“A slower fiscal consolidation” may help as U.K. consumers repair balance sheets, Marian Bell, a former Bank of England policy maker, said on the same program. “What matters for the markets is that a medium term consolidation plan is in place. I think the speed is perhaps less important.”
Fitch Ratings and Moody’s Investors Service have warned that any slippage in deficit reduction could cost Britain its top credit rating. The opposition Labour Party says the government is going too fast and damaging the recovery.
“The markets recognize that if the economy turns out weaker than expected and you try to compensate for that by tightening even further, then that way madness lies,” said Davies, who left the Bank of England in 1997 to lead the Financial Services Authority until 2003.
Both Davies and Bell cautioned that any change in fiscal policy should be limited.
“You could distinguish between Osborne saying, ‘look, the growth rate’s not been as much as we expected so the deficit reduction is going to take a bit longer,’” Davies said. “Another thing would be to come out and say, ‘oh God, got it wrong, turning on the tap, going to increase discretionary spending.’’
Both economists also said that policy makers should look to business investment as a driver of growth.
Investment is ‘‘the part of the economy that’s particularly weak’’ and ‘‘perhaps it could be easily stronger,’’ Davies said. ‘‘Consumer spending is a bit held back’’ and ‘‘the big export markets nearby are in pretty depressed condition, so really it’s private investment that would be able to pick up the slack.’’
Davies said that uncertainty on energy and transport policy is discouraging business spending. Bell said that easing of bank capital requirements might help encourage lending to businesses.
‘‘If you look at the balance sheets in the U.K. economy, where there is the possibility of expansion is the corporate sector,’’ said Bell, who was a member of the central bank’s Monetary Policy Committee from 2002 to 2005. ‘‘I would be looking at ways of allowing banks to lend more by perhaps relaxing some of the capital asset requirements.’’
Bank of England Governor Mervyn King will present the central bank’s quarterly inflation and growth forecasts in London on May 16. The central bank halted expansion of its quantitative easing program last week after spending 325 billion pounds ($522 billion) buying bonds to stimulate growth.
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