On Thursday, the Bank of England governor, Sir Mervyn King, said that it is 'acceptable' for the government to miss its deficit reduction targets whilst the UK economy is in recession. This follows Prime Minister David Cameron MP's refusal at this week's PMQs to recommit the government to the debt targets - falling ratio of debt to gross domestic product (GDP) by 2015/2016. So, it seems after the government's programme focused upon reducing the deficit and the debt as its principal mission is not so important after all?
Does the Bank of England really need to give the government license on this, or is King admitting covertly that the government's austerity programme is not working? Actually, this is the same programme that King himself endorsed in a partisan interjection usually avoided by central bank governors during last general election and again as recently as May 2012 when he stated that the austerity programme was an 'absolutely textbook response' to the economic situation facing the UK. When, as likely, the government misses its target, will the Chancellor, George Osborne MP, cite King's statement as cover for his failing policy? Perhaps King's 'pre-pardon' for not meeting the debt targets is orchestrated by Osborne himself, wearing his 'conservative party chief tactician' hat, with a view to the next general election in 2015? Perhaps King is helping to provide some cover for the eventual 'U-turn' on Plan A and adopting a Plan B focused on growth?
King still cites the eurozone crisis as a 'dark cloud' over the UK economy, echoing the government's mantra as well. Neither the government nor King gives a second thought as to whether it is the government's austerity policy clouds that are causing the rain upon the UK economy. Let's blame 'Europe' - great way to hit two targets at once: throwing a small bone to the eurosceptic Tory backbenchers by taking a gratuitous swipe at the eurozone and bolstering their view that all that ills the UK emanates from the EU and, more importantly, deflecting responsibility away from the Chancellor and the Tories generally, for a failing economic programme.
It is a massive admission of failure after the Bank of England has tried in various ways to compensate for the government failure to realise that the weakness of the economy is due to lack of demand rather than to any 'supply side' issues such as reducing taxes on business taxes and on those assumed to create employment in the economy (as the US Republican party likes to say, 'job creators'), labour market rigidity, privatisation of government services and in general, the 'stifling effect' of the regulatory state.
The Bank of England has embarked on quantitative easing (now up to a total of £375bn) and most recently announced the £100bn 'funding for lending' scheme whereby the Bank of England will provide funds to banks for on-lending to non-financial firms and individuals. These various programmes have tried to compensate for the lack of fiscal stimulus by pumping money into the economy, albeit via an indirect and perhaps a broken route: the banks. The only reason to rely upon the banking system (which as we all know has not recovered from the crisis) is that the direct route to get funding to the real economy, government spending, is vetoed by the government driven more by ideology than economics?
Would not direct spending by the government work better and a better use of nearly £500bn, as the funds are guaranteed to reach the real economy and not get stuck inside banks and financial institutions bidding up the prices of financial assets, but having no real effect on economic activity and growth? Alas, this is a political decision as one based solely on economics would surely see that an expansionary fiscal policy is the answer to growth.
In his final months as Governor, King should stop enabling the government to keep on the austerity path and tell it as it is: that the government needs to reverse its austerity in the short-term as the economy needs growth before we can tackle the longer-term issue of the debt. That is, unless King does not mind being used as political cover by Osborne to maintain a flawed policy.
Let's stay tuned to see what Osborne says in the autumn statement scheduled for 5 December 2012.