Bank of England chief backs government and defends his record during the financial crisis following BBC lecture
Sir Mervyn King, the governor of the Bank of England, has backed the government’s public spending cuts as a “balanced” austerity budget that was only knocked off course by higher than expected inflation.
Speaking on BBC Radio 4’s Today programme after giving the show’s annual lecture on Wednesday night, King said George Osborne had struck the right balance between spending and cuts. Without a spike in food and oil prices over the last couple of years the UK was on course to achieve steady, slow growth in 2012, despite falling into recession in the last quarter, he said.
“If it had not been for the squeeze on real take-home pay being exacerbated by the rise in energy and food prices then I think we would have seen some growth,” King said. “I think a reasonable view would be that we would start to see steady, slow recovery coming during the course of the year.”
Labour has claimed it is a recession “made in Downing Street”, but King said: “The strategy was that there would be a gradual move towards reducing the budget deficit over five years, that there would be an acceptance of the significant fall in sterling of 25% and there would be a rebalancing of the economy,” he said.
“We had to rebalance our economy because we had a trade deficit. So this was an absolutely textbook response to the situation.”
King backed the government as he defended himself against attacks on his record during the financial crisis, following his speech on Wednesday night.
Interviewer Evan Davis said it was surprising the governor commented on politicial decision-making around the budget, only to be told by King that his counterparts around the world were more meddlesome than he had ever dared to be.
He claimed he only commented on the overall shape of the budget when he was asked and never sought to involve himself or the bank in politics.
King was criticised by the former chancellor Alistair Darling in 2010 by appearing to support Osborne and David Cameron after holding private talks days ahead of the election.
Labour MP Andy Love, a Treasury Select Committee member, said after the interview: “This is a very unwise intervention by the governor as voters go to the polls.
“He has been less than forthcoming about the Bank of England’s mistakes in the run-up to the crash when it had a very clear responsibility for financial stability.
“And he is compromising his position by once again backing George Osborne’s economic plan, even though we now know it has comprehensively failed and pushed Britain back into recession.
But Conservative Party deputy chairman Michael Fallon agreed that the governor’s speech was an attack on Labour’s record in office.
“King has said Ed Balls’ and Gordon Brown’s decision to take the power to regulate the banks away from the Bank of England meant the financial crisis wasn’t prevented.
“And he has backed the government’s ‘textbook’ plan to deal with our debts and live within our means, rejecting Labour’s plans for more spending, more borrowing and more debt – exactly how Ed Balls and Gordon Brown got us into this mess in the first place.”
The governor, who steps down next year after 10 years in office, also countered criticism that he failed to spot the banking crisis and was a barrier to rescuing banks when it became obvious they were in trouble during the summer of 2007.
Davis said many experts accused him of being too academic and keener to moralise about the greed and mistakes made by bank bosses than to salvage the crucial sector of the economy.
King said: “I don’t think I have been too academic. I think a knowledge of financial history is essential and I wish, if anything, I had turned to it earlier.”
He said he put the central bank’s funds at the disposal of troubled banks, and that the collapse of the system was due to the insolvency of many banks, not the need for short-term loans.
But his testimony is contradicted by the failure of Northern Rock, which was the only bank to suffer a run on its deposits after it was refused central bank funds. Most of Britain’s banks would have run into more serious trouble during the credit crunch but for their access to the European Central Bank via their branches in eurozone countries.
King said in his speech that there were no signs during 2005-06 of problems in the wider economy to upset the view that markets were working to the benefit of citizens. Inflation, unemployment and economic growth were moderate when they would be expected to rise at unsustainably high levels ahead of a potential crash.
However, critics say he forgot to mention that Britain was in the midst of a rampant housing boom in the years after 2000 and that many experts, including the current business secretary, Vince Cable, were warning of an impending collapse in prices and huge problems for banks that had lent too much.