The Governor makes a stand

Sailing very close to what is allowed under the terms of Bank of England independence, the Governor of the Bank Mervyn King has made a dramatic statement about how much scope the government has to launch a fresh fiscal stimulus when the delayed Budget is announced on the 22nd of April.

The Governor is clearly very concerned about the ballooning level of government debt and that monetary policy should not simply be discarded as the main instrument for supporting confidence and demand during the economic crisis. He is quoted as saying to the Treasury Select Committee that

“We are going to have to accept for the next two or three years very large fiscal deficits. Given how big those deficits are, I think it is sensible to be cautious about going further in using discretionary measures to expand those deficits.”

A2 economists should note this idea of discretionary measures i.e. a further deliberate easing of fiscal policy to boost aggregate demand beyond that which occurs through the working of the automatic stabilisers.
It is important that the Bank of England takes a stand when it feels that the government is in danger of losing complete control of its own finances. It estimated that UK public borrowing will soar to 11 per cent of national income (£165bn) in 2010. And the total increase in national debt over the three years between 2008-09 and 2010-11 is set to be far higher than the £356.4bn inherited by Labour in the spring of 1997.

More here from The Times: King - ‘UK can’t afford any more stimulus plans’