SOMETHING remarkable happened last week. Chancellor George Osborne announced the appointment of Canadian central banker Mark Carney as the next governor of the Bank of England.
The warring political tribes found common ground, in public. I expected to look up from my triple-yoke boiled egg to see a two-headed horse trotting down my road and a flock of migrating Canadian Geese flying backwards across the Pentland Hills. But no strange portents emerged.
Despite my default urge for peace and reconciliation I have to admit that the political part of my brain did start glowing red for danger. Whenever the entire establishment rejoices in agreement there must be a catch somewhere. “Group-think” has proven itself to be a dangerous place to live in the past decade after all.
But credit where credit is due. It appears George Osborne was able to persuade his favoured candidate to bring fresh blood and a keen brain to the policy table at just the right time.
I will confess to not knowing enough about Carney to be able to say more than that. I can see his credentials are impeccable. What he will need though is leadership and management skill in some measure. The policy minefield he must now navigate includes an inter-generational structural change in the regulatory landscape which on its own would be a life’s work. Alongside it though he must consider when to turn the tap off on the mass money printing of Quantitative Easing and then when to pull the plug on the bath it has filled.
With this and interest rates at near zero, the monetary fire is set under the economy’s pot, though the water remains lukewarm. There are risks in all directions and the one he is paid to worry about most is of a destructive inflationary surge if his handling of the controls is less than deft.
So he will earn every penny of his pay and we must all wish him well, just as we must allow George Osborne a moment of peace for getting that job done. But no more than a moment. Because his next judgment day comes on Wednesday at 12.30pm with his Autumn Statement. This is when we judge how public finances are progressing against plans and a signal of what further action might be required.
Few chancellors can resist a touch of theatre around the politics at these times and this is one of the most political Finance Ministers of modern times. But resist he should. Where Alistair Darling was seen by most analysts as having his focus on policy rather than politics through the crisis (to his enormous credit), Osborne has risked being seen as the opposite. My admiration and respect for Darling as a result of that period is something I am working hard to get over, and I may never succeed.
But I also see ability in Osborne. He has talent, be in no doubt, but he must look to repeat the trick of winning the consensus of last week if he is to deliver the reforms we need to restore the economy to a sustainable growth path.
The Institute of Fiscal Studies (IFS) has identified significant worsening in the outlook for the public finances since the spring. This is driven by both weaker economic performance but also a weaker revenue take from taxation than the economic conditions would suggest. If this is temporary we need not worry more than we should be worried already. If however it reflects a structural weakening in the performance of the tax base and system then we could have a material cause to worry more.
In this event they say a further £23 billion of tightening (taking money out in tax rises or spending cuts) would be needed in the next five years to achieve the Chancellor’s fiscal mandate. To place that in context, the entire Scottish Government budget is £28bn next year.
The same calculating markets that Osborne feared would hammer the borrowing costs of the UK if he wasn’t tough enough on cuts will now punish him harder for being too tough and scuppering growth.
Too often in budget statements we pretend the money in and out with policy change is guaranteed. As the IFS shows, it isn’t, it all depends on the health of the economy and the tax base – in other words the people paying tax.
The IFS study should help all politicians refocus on the key challenge of fiscal policy which should be to maximise the health of the tax base so that it takes less tax to get more revenue and it needs less spending to dry the tears of policy failure. Too often do we discuss policy as a zero sum of money in or out when the impact on the growth engine matters most.
Now more than ever we need all sides focused on growth short, medium and long-term. The case for a plan B is compelling. Continue to prioritise cuts and tax rises over growth and the base producing the revenue will diminish. The stakes at this time could scarcely be higher.
Now is not the time for clever politics or sleight of hand. Right now we need our leaders to lead, starting Wednesday at 12.30pm. «