Mervyn King is at it again. The governor of the Bank of England backed the government’s austerity policies too explicitly and is now writing its excuses for missing its fiscal targets. That’s outside the scope of King’s monetary remit. But George Osborne, the Chancellor of the Exchequer, should make the most of the governor’s green light. The weakness of global growth ought to encourage the UK to move its targets, not tighten its fiscal policy further.
The governor’s loose talk is undesirable because the BoE must appear impartial. Fiscal policy is all about political choices. The opposition thinks the coalition made the wrong ones. The latest woeful fiscal figures might seem to support that: the government’s aim for 2012/13 is that its deficit should fall by 4.6 percent. In the first five months of the fiscal year, excluding the transfer of Royal Mail pension funds, it has risen by 21.8 percent.
Curiously, this does not mean the government will necessarily miss the carefully worded fiscal rules that King is referring to. The first prescription is for “cyclically adjusted” current fiscal balance at the end of the five-year forecasting period. The cyclical element brings a shifty quality. The second is for a falling stock of debt as a percentage of GDP by 2015-16. The fixed date here is inconvenient, but handily the rule does not specify the required debt level. Even if debt is much higher than forecast it could be falling as a share of GDP by the deadline. But what is more important is that a realist would assume debt will now climb higher than the currently forecast peak of 76.3 percent of GDP in 2014-15.
Introducing further spending cuts and tax rises now just to meet targets would seem certain to stamp all over the UK’s seedlings of recovery – and lead to more of the same: low growth and weak tax receipts. The complicated reality is that both the euro crisis and government spending cuts have reduced growth. Cuts to current state expenditure were and remain essential but the blow inflicted by the euro zone should stop the government from stepping up the cuts. Instead, some stimulatory capital expenditure might be wise – even at the near-term cost of upping the deficit.
Targets bring discipline and are important. But to fix your binoculars on medium-term goals and ignore the present mess in the euro zone would be a mistake.