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King's austerity warning to new government

By Channel 4 News

Updated on 29 April 2010

The Bank of England governor warns that the party which wins the election could end up out of office for a generation after the austerity measures it will have to introduce. Faisal Islam reports.

Mervyn King, Bank of England governor (Reuters)

An American economist, David Hale, has claimed that Mervyn King told him shortly before the start of the election campaign that the party that wins the election on 6 May could find itself out of office for a generation afterwards - such will be the unpopularity of the measures they will have to introduce.

Speaking on Australian television last night, Mr Hale said Mr King had told him that a hung parliament would make it very hard to impose the tough fiscal policies Britain need.

He went on to say that Mervyn King had said: "Whoever wins this election will be out of power for a whole generation because of how tough the fiscal austerity will have to be."

Discussion: Yvette Cooper, Vince Cable and Philip Hammond
Interviewed by Jon Snow, Labour's Yvette Cooper said the priority was to ensure that the economy was growing strongly first – and then the government would have to make sure the deficit was brought down.

She said Alistair Darling had set out a programme to halve the country's deficit in four years, but it had to be done in a way that was fair.

For the Liberal Democrats, Vince Cable claimed his party had been much more explicit about the measures that were needed.

Discussing Bank of England Governor Mervyn King's warning about future austerity measures, he said they would have to run in parallel with fair taxation in order to make them acceptable. That was why the Lib Dems wanted to raise the income tax threshold.

Phil Hammond, of the Conservative party, said David Cameron was the first party leader to say that public spending would have to be cut. He thought the British people understand that we have to start living within our means.

Yvette Cooper said a Conservative government would need to increase VAT to compensate for "a whole series of major cuts in taxes". She said the alternative to a VAT hike in this situation would be to hit the budgets for schools and the police.

Phil Hammond said the Conservative party had concluded that 80 per cent of the burden for cutting the deficit had to be borne by reductions in public spending. "The question now for the British people," he said, "is about who best will be able to protect frontline public services while making those reductions in spending."

Vince Cable repeated that the public had to be prepared for public spending cuts to reduce the deficit – and there also had to be fair taxation. He said what had emerged from the IFS analysis was that we could not rely on vague promises to improve efficiency in government.

Asked by Jon Snow whether a government of national unity was a way to carry the country through the tough times ahead, Yvette Cooper said: "It's for the voters to decide." She thought there was "a lot at stake in this election” because there were going to have to be tough decisions.

Vince Cable thought that all three parties needed a common understanding after the election on the scale of the problem.

Phil Hammond countered that "future growth cannot be delivered by public sector spending on the back of huge borrowing alone – we have to reactivate the private sector".

Channel 4 News Economics Editor Faisal Islam writes
The election in many ways is a lie.

What Greece is showing, and the reported views of the Bank of England governor too is that Britain over the next two to three years will not resemble the picture of the country being sold to you in tonight’s leader’s debate.

When I interviewed David Cameron in January, I specifically put to him the idea that no political party that had offered the British people austerity had been re-elected, apart from Mrs Thatcher. He replied by saying that the whole country knew "we had to deal with these problems". He said voters respected people "who tell it like it is".

So it is of no surprise that Mervyn King has been saying, according to one lunch companion that "whoever wins this election will be out of power for a whole generation because of how tough the fiscal austerity will have to be".

The bank is at pains to point out that this was not an attempt to interfere with the election, that the lunch happened in early March, and that they would not confirm the contents of this private conversation.

However, these comments are very much in keeping with Mr King's public comments on the deficit. It certainly seems that he shares the concerns of many economic experts that the public is not being adequately prepared for the pain to come after an election.

It is a matter of mandate. The Conservatives made a lot of the mandate argument in the autumn. The austerity message continued until it was roundly dumped after the budget in favour of sunshine, optimism, and stopping the so-called "jobs tax".

In the likely absence of a straight Labour victory, it seems very likely that we will get an "emergency budget" in the summer, whatever the result or coalition. Look at Portugal yesterday, where the equivalent of Brown and Cameron emerged for the cameras together to announce extra austerity.

Now, of course, we are not Greece. But even on any measure of historical austerity – say, 1993 – it is instructive that we saw huge expansions in VAT, and national insurance, and restrictions of income tax allowances, and 10p on petrol, booze duty up, not to mention savage spending cuts. The fiscal repair job from 1993 was 5.5 per cent of GDP. Now it needs to be 8.4 per cent – i.e. the same as 1993 and then half as much again.

Let's make that clear again. If there was a unit of scale to measure tax and spending pain, a kind of fiscal Richter scale, then say 1993-1999 was a "nightmare", then 2010-2016 would rank as one and a half "nightmares". Greece is enduring multiple nightmares: VAT set to be hiked to 25 per cent alongside further public sector pay cuts is the latest rumour emerging from the difficult IMF/EU negotiations in Athens.

The Labour campaign has attacked most types of spending cut. The Tory campaign abandoned fiscal hawkery for the lozenge of lower taxes. The LibDem "saints" launched a poster attacking the supposed "Tory VAT bombshell" knowing full well that it could not rule out a VAT rise itself.

Remember tonight's debate in a couple of months' time, when the alleged shock of the black hole in the public finances is thrust upon Britain.

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