What the Governor said
Bank of England governor Mervyn King, appeared before the Treasury Select Committee yesterday and expressed his opposition to any further fiscal stimulus.
"There is no doubt that we are facing very large fiscal deficits over the next two to three years... I think it's right to accept that when the economy turns down and the automatic stabilisers kick in, so the increased benefit expenditures and lower tax revenues are bound to lead to higher fiscal deficits. And it doesn’t make sense to try and offset that.
"So we are going to have to accept, for the next two to three years, very large fiscal deficits. But given how big those deficits are, I think it would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits. That’s not to rule out targeted and selected measures that may find those areas, whether it’s in the labour market, whether its in corporate credit, that can do some good.
"But I think the fiscal position in the UK is not one where we could say, well, why don’t we just engage in another significant round of fiscal expansion. We could do more monetary easing if necessary, but monetary policy should bear the brunt of dealing with the ups and downs of the economy."
Hat-tip to Conservative Home for advising me that Shadow Chancellor George Osborne responded as follows:
“This is a defining moment in the political argument on the recession. The big debate in British politics about the recession has been whether or not the country could afford a debt-funded fiscal stimulus... The Governor of the Bank of England no less has said Britain cannot afford a further fiscal stimulus. He goes on to say that monetary policy should be the main tool to tackle the recession.
”This is hugely significant, as it completely vindicates the big decision taken by David Cameron and myself on the economy, and it leaves Gordon Brown's political plans for the G20 and the Budget in tatters.”