Bank of England Governor Mervyn King said it would be acceptable for the government to miss its debt-reduction targets if it’s because the economy failed to recover from the recession.
“If it’s because the economy’s grown slowly, yes, indeed, and that was always part of the plan,” King said in an interview on Channel 4 television in London late yesterday. In that situation, “it would be acceptable to be in that position. But if the world economy were to pick up and we could grow quite quickly, then it would not be acceptable to miss it if we have no real excuse.”
The uncertain economic outlook has prompted speculation that Chancellor of the Exchequer George Osborne will miss one of the two pillars of the government’s fiscal policy -- a commitment to see net debt fall as a share of the economy from 2015. King also said there are signs of a modest recovery in the U.K., though he cautioned that a “black cloud of uncertainty” remains, and a lot will depend on developments in the euro area.
Osborne’s fiscal plan “did allow for the fact that if the economy were to grow slowly, then taxes would not rise as quickly and spending would be higher so the deficit would be bigger,” King said. “And the plan said, ‘don’t attempt to bring that deficit down if it’s the result of slow growth in the economy,’ and that’s exactly what’s happening.”
Data today showed Britain posted its biggest August budget deficit on record, increasing pressure on Osborne as the recession hits tax revenue. The shortfall excluding government support for banks was 14.4 billion pounds ($23 billion). Tax revenue rose 1.8 percent from a year earlier and government spending climbed 2.5 percent.
King said the U.K. economy is likely to grow this quarter for the first time in a year after a 0.5 percent slump in the three months through June. Still, when asked, he said he wouldn’t use the phrase “green shoots.”
“The last quarter was down, I think the next quarter will probably be up,” he said. “I think we’re beginning to see a few signs now of a slow recovery, but it will be a slow recovery. After a banking crisis, one can’t expect to get back to normal, and I fear it will take a long time. What it will depend on critically is what happens in the euro area and also the rest of the world.”
Asked about the European Central Bank’s latest measures to tackle the euro-area debt crisis, he said it isn’t a long-term solution, “but it may buy enough time for them to work out what is the long-term solution.”
He also said that euro-area leaders have “tried very hard to keep the show on the road, but I don’t think there’s any guarantee that they’ll be able to do that.”
King, who is due to retire in June 2013, said he supported the original recommendations of the Independent Commission on Banking before they were softened by the U.K. government. Still, he added that the key thing now was to press on with the current reforms.
He also said he expects more U.K. banks may be fined by regulators over manipulation of the London interbank offered rate after Barclays Plc in June. Britain’s Financial Services Authority is scheduled to release a report next week on the future U.K. regulation of Libor and other interest rate benchmarks.
“Prosecutions may well emerge and I’m sure large fines may emerge,” King said. “All this is deeply unsatisfactory.”