May 13 (Bloomberg) -- As Prime Minister David Cameron sealed his U.K. coalition deal with Nick Clegg’s Liberal Democrats he signed up one more ally: Mervyn King.
The Bank of England Governor yesterday endorsed Cameron’s plans to cut the record budget deficit after discussing the government’s proposals in a morning telephone conversation with Chancellor of the Exchequer George Osborne. The new government plans an emergency budget within two months.
King’s comments will help Cameron shore up his authority after the Conservative Party failed to win a majority in last week’s election, forcing him to form Britain’s first coalition since World War II. His assent may also silence critics in the opposition Labour party, which fought the campaign on the need to keep up spending and sustain the economic recovery.
“This ‘BOE blessing’ should markedly reinforce the political position of the Conservative-Lib Dem coalition,” Michael Saunders, chief western European economist at Citigroup Inc., said in a note to investors.
The pound dropped 0.5 percent from yesterday against the dollar and traded at $1.4758 at 11:05 a.m. in London. Against the euro, sterling weakened 0.2 percent to 85.31 pence.
Osborne told Cameron’s first Cabinet meeting today that economic priorities would include tackling the deficit and banking reform, Cameron’s office said in an e-mailed statement. The chancellor told reporters afterward that the coalition committed to “significantly accelerated” cuts to the structural part of the deficit and that the country faces a “difficult economic situation.”
King, whose 5-year term will end in 2013, is politically independent by law and usually restricts his comments to monetary policy. While he hosted the press conference yesterday to explain the bank’s latest quarterly economic forecasts, the budget deficit dominated the proceedings.
When asked why he was being so explicit on the government’s plans, King said that he tried to intervene “as little as possible” before the election. It was appropriate to comment on the deficit now in a “very unusual situation” where the coalition partners had sought his advice, he said.
“He knows that whatever he says is going to have incredible resonance and can be used one way or the other,” Grant Lewis, an economist at Daiwa Capital Europe Ltd. and a former U.K. Treasury official, said in a telephone interview. “It helps bolster the government’s position and he knows it.”
Cameron is proposing 6 billion pounds ($9 billion) of spending cuts in this fiscal year. Former Prime Minister Gordon Brown argued repeatedly in the election campaign against an immediate budget squeeze to maintain the economic recovery. King refuted that concern yesterday, saying that a spending reduction of that size is unlikely to “dramatically change” the economy’s outlook.
“The fact that the Bank of England now has the view that the bigger risks are very much from not doing enough is going to be very helpful for the new government,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London and a former U.K. government adviser. “It will help neuter any opportunistic populists and political opposition to this.”
Opposed by Some
That support would be welcome for Cameron, who must sustain an alliance with the Liberal Democrats opposed by some supporters of both parties. Cameron sought a coalition after his Conservative Party failed to gain enough seats to control Parliament in the May 6 election, and clinched an agreement after a five-day courting session.
The governor still wants to remain as much as possible out of politics and his comments yesterday would have been motivated by his concern for the economy rather than partisanship, Peter Dixon, global equities economist at Commerzbank AG in London, said in a telephone interview.
“I don’t think he’s taking sides politically,” Dixon said. “People try to attribute political machinations to Mervyn’s stance, but I think genuinely he does remain above the fray and his comments on fiscal policy have been framed in the economic context of the past 18 months, rather than a political one.”
King has spent more than a year urging government ministers to take action on the country’s record deficit, providing ammunition for both Cameron and Brown in their sparring matches in Parliament. King said yesterday that Greece’s fiscal crisis shows what can happen when budgets run out of control.
“It’s music to the government’s ears,” Brian Hilliard, a London-based economist at Societe Generale SA and former Bank of England official, said in a telephone interview. “It’s immensely helpful to the government because what it does is give the market’s support for the contentious issue of making a rapid start on deficit reduction.”
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