Thursday 17 February 2011

Mervyn King being too political for independent Bank, warns Ed Balls

Shadow Chancellor Ed Balls tells the Financial Times in an interview that Bank of England governor Mervyn King is being drawn too far into party politics through his vocal support for the Coalition government's economic strategy. Balls, who was the architect of Bank independence now fears that this may be at risk.

Ed Balls, shadow chancellor, has criticised Mervyn King, Bank of England governor, saying he should step out of the political arena and stop tying his credibility to the coalition’s “extreme” deficit-reduction plans.

In an interview with the Financial Times, Mr Balls drew comparisons between Mr King’s stance and the backing lent by the Bank of England to the Treasury’s fiscal hawks during the Great Depression.

“The last thing you ever want is for the Bank of England to be drawn into the political arena,” said Mr Balls, one of the architects of Labour’s plan in the 1990s to give the Bank its independence. “Central bank governors have to be very careful about tying themselves too closely to fiscal strategies, especially when they are extreme and are making their job on monetary policy more complicated.”

The concern about King being drawn into partisan politics has also been expressed by the Conservative chair of the Treasury Select Committee Andrew Tyrie.

“I’m sure that for a committee such as ours the safeguarding of the Bank’s impartiality is . . . important", Tyrie told King at a select committee hearing in November last year, where Monetary Policy Committee member Adam Posen told the committee that MPC members had been concerned about 'excessively political' interventions from the Bank.

“There was a difference of opinion at the MPC . . . over a particular paragraph in the [May inflation] report that was talking about the need for a particular speed with which to deal with the fiscal policy"

“A number of the people on the committee, myself plus at least one other . . . were concerned that that statement could be seen as excessively political in the context of the election.”

These concerns again came to the fore this week.

Mervyn King's speech on Wednesday surprisingly used the highly political language 'there has to be a plan A' in a headline soundbite, at a time when the official Opposition's calls for the government to have a 'plan B' are perhaps the central issue of party political controversy over the economy.

King's comment was immediately eagerly seized upon by the Prime Minister to make a party political point in his first response to Ed Miliband at Prime Minister's questions.

Ed Miliband: We now know that inflation is rising, growth has stalled and an extra 66,000 young people are out of work. Can the Prime Minister tell us whether he thinks his strategy is working?

The Prime Minister: Of course today's unemployment figures are a matter of great regret, particularly in terms of higher youth unemployment, but I have to say to the right hon. Gentleman that youth unemployment has been a problem in this country for well over a decade, in good years and in bad. The level of youth unemployment actually went up by 40% under the last Government-an extra 270,000 young people unemployed. What we have to do is sort out all the things that help young people get back into work. There is a welfare system that does not help you get work, an education system that does not prepare you for work and back-to-work programmes that, under the last Government, simply did not work.

The right hon. Gentleman asked me what is happening in our economy. We are no longer linked with Greece and Ireland and those countries in the danger zone. We have a situation where market interest rates have fallen. Our credit rating is secured. There are 218,000 more people in work than there were a year ago.

Above all, what I would say to him is what the Governor of the Bank of England said this morning:

"There has to be a plan A... This country needs fiscal consolidation to deal with the biggest budget deficit in peacetime"

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