Bank's King warns on fiscal stimulus

LONDON Tue Mar 24, 2009 7:42pm GMT

1 of 2. A video grab image shows Bank of England governor Mervyn King speaking to parliament's Treasury committee in London March 24, 2009. The euro hit a session low against a buoyant pound on Tuesday after King said he saw no reason why the pound should go any lower. The euro fell to a session low of 91.72 pence, 1.9 percent lower on the day. It was last at 91.83 pence. The pound was also 1.2 percent higher at $1.4743.

Credit: Reuters/ Parbul TV via Reuters TV

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LONDON (Reuters) - Bank of England Governor Mervyn King warned the government Tuesday that its burgeoning budget deficit meant it would have to be cautious about any new fiscal stimulus package to boost the economy.

Prime Minister Gordon Brown hopes to persuade other big developed and developing economies at a G20 summit on April 2 to agree on ambitious new spending to lift the world economy out of recession, but King said Britain had little room for manoeuvre.

"I'm sure the government will want to be cautious in this respect. There is no doubt we are facing very large fiscal deficits over the next 2-3 years," he told a committee of legislators from the lower house of parliament.

King said that even though the world economy faced an unprecedentedly large downturn this year, monetary policy should deal with the brunt of it, and that the British economy had yet to feel the benefit of the central bank's recent rate cuts and asset purchases.

"We can do more monetary easing if necessary," he said.


King's remarks sparked suggestions of a rift between the governor and Brown.

In response, a spokesman for Brown noted that King had "supported the action that the government have taken so far in the form of a fiscal stimulus."

"I think what is important to note is that the action we have taken has been mirrored in other countries around the world," he added.

"Any further action or announcements would be for the chancellor (finance minister) in the budget (on April 22)."

Chancellor Alistair Darling forecast in November that the cyclically adjusted net borrowing would peak at 7.2 percent of gross domestic product (GDP) in the 2009/10 tax year, and many economists now say the worsening economy makes that a big underestimate.

"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," King said. "The level of the fiscal position in the UK is not one that would say: 'Well, why don't we just engage in another significant round of fiscal expansion?'"

The European Commission agreed, warning that Britain should correct its "excessive budget deficit" by the 2013/14 tax year.

The Conservatives seized on King's comments to criticise the government.

"We've now got Mervyn King agreeing with us that a second fiscal stimulus is unaffordable," Conservative finance spokesman George Osborne told BBC radio.

Darling announced a fiscal stimulus package worth 20 billion pounds in November in addition to tens of billions spent on shoring up banks, but there has been media speculation that a further package may come with the budget.

King's Bank colleague David Blanchflower, a labour economist who has regularly voted for looser monetary policy than his Bank peers, was more supportive of higher spending, but did not repeat his recent call for a stimulus of 90 billion pounds.

Programs to subsidise employment and training could be justified because of the high cost of long-term joblessness, he told the legislators.

(Additional reporting by Fiona Shaikh, Frank Prenesti and Keith Weir; editing by Andy Bruce)