King Says Debate on U.K.’s Fiscal Policy Has Become ‘Overblown’Jennifer Ryan
Bank of England Governor Mervyn King said the debate on fiscal policy has “really got overblown” and the government’s plan to aid home buyers shouldn’t become permanent.
“Everyone agrees on the following propositions: first that we do need a credible medium-term plan to get the public finances back into order and, secondly, that we should allow the automatic stabilizers” to take effect, King said in an interview broadcast yesterday on Sky News television.
“If tax revenues fall, you don’t cut spending elsewhere to make up for it, you allow the deficit to adjust for the state of the economy, you allow these automatic stabilizers to work,” he said. “Those two principles, a credible medium-term plan and flexibility, is the right way to go.”
Chancellor of the Exchequer George Osborne wrote in the Mail on Sunday newspaper that he’ll “keep pushing forward” with his budget cuts after the International Monetary Fund said the U.K. should consider easing the pace of austerity. Giving Osborne ammunition against critics, the economy grew faster than forecast in the first quarter and the BOE raised its growth projections last week.
King, who will be replaced by Bank of Canada Governor Mark Carney on July 1, said a “modest recovery” is under way, though “more needs to be done” to encourage growth. Britain has avoided some of the turmoil in Europe because the drop in the pound is stimulating exports and the fiscal plan has flexibility, he said.
The pound rose 0.2 percent to $1.5203 as of 8:46 a.m London time. It’s fallen about 6.5 percent against the U.S. currency this year.
King said the government’s Help to Buy plan to aid homeowners “is a little too close for comfort to a general scheme to guarantee mortgages” as in the U.S. While the bank’s Financial Policy Committee will assess economic conditions to judge the right time to end the program, “it shouldn’t become a permanent feature of our financial landscape,” he said.
Rightmove Plc said today that U.K. home sellers raised asking prices for a fifth consecutive month, pushing values to a record. Prices sought rose 2.1 percent in May to an average 249,841 pounds ($380,000), taking the increase in the first five months of the year to 9.1 percent. London asking prices increased 3.3 percent to 509,870 pounds, also a record.
Asked whether the government’s plan would fuel a bubble in house prices, King said values were 14 percent below their peak.
“Interest rates are low right across the world and that inevitably pushes up asset prices,” he said. In the U.K., house prices have been “remarkably stable for the last few years. That’s not a bad position to be in,” King said.
“The comments I think are certainly common sense; that shouldn’t detract from the view that the scheme is helpful to get the housing market moving,” Philip Shaw, an economist at Investec Securities in London, said in an interview. “The governor is bowing out without making excessive criticisms of government policy, and while his remarks are a warning, they’re a constructive warning.”
The U.K.’s budget shortfall in March was 7.8 percent of gross domestic product, in line with the Office for Budget Responsibility’s forecast. Fitch Ratings last month became the second ratings company to strip Britain of its top grade.
“You can only keep rates low if you control government spending, so we set out a credible deficit-reduction plan and stuck to it,” Osborne wrote in the Mail on Sunday. The Help to Buy plan “is possible only because of the credibility that our deficit-reduction plan has earned.”
The Washington-based IMF lowered its U.K. growth forecast last month to 0.7 percent in 2013 and 1.5 percent in 2014, a 0.3 percentage-point reduction in both years. While the BOE has since raised its own outlook, threats to the recovery remain.
King said the “single biggest risk is that the euro area continues to grow very slowly,” and that U.K. banks’ “exposure to the euro is undoubtedly the single biggest factor dragging down on our economy.”
Banking reforms in Britain, including the BOE’s new oversight role and higher capital requirements, mean the industry is “moving a long way” from its “very fragile” state before the fiscal crisis, when taxpayer bailouts were required, he said.
“We have a bit further to go but we are not far from it and in the next one to two years we’ll get there,” King said.
‘Failure of System’
Bankers’ behavior “is not the only explanation of the crisis that we had,” he said. “Don’t demonize individuals here. This wasn’t a problem of individuals, this was a problem of failure of a system.”
Still, “we are not seeing the lending that we’d like to see,” he said. There also aren’t signs of an “extraordinary expansion” of lending that would stoke a rapid pickup in inflation, though the bank would act to contain price gains.
“I think we would get enough time to be able to raise interest rates or take other measures to prevent that turning into a rapid upward push on bank lending and inflation,” he said. “We have to get to a point where we can see more sign of a recovery but the bank will need to be prepared to move quickly when necessary.”
The nine-member Monetary Policy Committee held its bond-purchase plan at 375 billion pounds this month and its key interest rate at a record low of 0.5 percent.
“We are seeing a recovery, it is only a modest recovery and we certainly can’t be satisfied with it, we will need to do more to use up the spare capacity,” he said. “In the end we will set the level of interest rates at the level that will ensure both adequate economic growth and, most importantly of all, to bring inflation back to the target.”