20 Sep 2012

The governor’s green light

Two technicalities, but I think two important moves from the governor of the Bank of England Sir Mervyn King in our studio tonight. First the looming issue as to whether George Osborne is about to miss his debt/GDP target in 2015 (that it falls by then).

He said the word “acceptable”. He said: “If it’s because the economy is growing slowly, yes indeed, and that was always part of the plan. If it’s because the world economy has grown slowly so we have in turn grown slowly, then that would be acceptable. It would not be acceptable if we have no real excuse.”

I interpret this as a green light for George Osborne, to miss or change or reinterpret what was the hardest and most unfudgeable of fiscal targets at the autumn statement in December. This is as crucial an economic decision for the coalition as one can imagine. To meet this target would require massive new cuts to spending or extra taxes. Some of that we will get anyway. This green light gives Mr Osborne the chance to consider some sort of economic boost to, for example, capital spending.

I suspect that it might be that the debt/GDP target is reinterpreted, or changed to being some sort of measure of structural debt. That would represent some wriggle room.

He also gave some indication that the double dip is over: “I think we are beginning to see a few signs now of a slow recovery, but it will be a slow recovery… and I fear it will take a long time.” He declined to use the phrase “green shoots”.

Lastly, he reopened the debate over the Vickers reforms. The chancellor did not accept the results of the conclusions of the Independent Commission on Banking in full. Most of it was incorporated into the financial white paper. Limits on the size of banks, particularly its leverage ratio were loosened by the chancellor. Sir Mervyn made explicit, and public, his concerns about the impact of big bank lobbying on that process.

He said his “personal preference” is that the banking reforms in the Vickers proposals are not watered down by pressure from the banks, saying the original proposals were “in the right direction”.

Asked about whether the limits on whether the way the banks finance themselves with borrowing would move he said: “The banks have lobbied for it, and we’ll see what happens when it goes to parliament – you can see why they have lobbied for it… There are very rates of return to pay high bonuses and if it goes wrong, the burden falls back on the taxpayer.”

“My preference is for a different ratio, but it’s better to have some ratio.”

A lot to chew over. More tomorrow.

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