I’M WONDERING if there are two different Sir Mervyn Kings claiming to be governor of the Bank of England. Last November, the pessimistic Mervyn announced the UK was in for “a period of persistently low growth” due to the “unappealing combination of a subdued recovery, with inflation remaining above target”.
But on Thursday, a more optimistic Mervyn was proclaiming “there is momentum” in the British economy. “I think that during the course of 2013 we will see the recovery come into sight,” he promised. Are there really two Mervyn Kings or has the governor had an epiphany on the road to his retirement party in June?
King’s explanation for this sudden reappraisal looks rather forced. He argues: “If you take away what happened in the North Sea oil production and in construction, the UK economy last year grew by 1.5 per cent.” True, but if you take away the bad bits, what’s left always looks a lot better. Trouble is, in the real world you can’t ignore the bad bits, which is why the UK might be in triple-dip recession as we speak.
The one clear shift since November is the dramatic fall in sterling, which has reversed last year’s 8 per cent rise. According to the Mk2 (optimistic) Mervyn: “We are moving to a properly valued exchange rate. I think we’re probably there.” However, it remains to be seen if the devaluation boosts exports in the second half of 2013, or merely pushes up inflation, further undermining stagnant consumer spending.
I do not wish to detract from the significance of the governor talking up recovery. However, this is the same man who has been voting (in the minority) on the Bank’s monetary policy committee for an increase in quantitative easing.
The truth is that the UK economy is on Bank of England life support and any return to normal interest rates would kill the housing market, send bank impairment charges through the roof, and push the pound back up again. King’s talk of “momentum”is hardly justified.
Osborne must avoid pastie tax debacle
LAST year’s Budget, with taxes on pasties, caravans and grannies, was a presentational disaster. Neither the Chancellor nor economic confidence can afford a repetition. Here are my humble suggestions for Wednesday:
• Even if George Osborne thinks major tax cuts are unaffordable, he must point in that direction. At the very least, that will signal that the worst of the downturn is over. So follow the Swedish model and pre-announce income tax cuts to be rolled out over the next five years. These should be focused on the low paid.
• Do something to unlock the estimated £750 billion of cash currently sitting in company bank accounts. Pre-announce more corporation tax cuts and give Scotland, Northern Ireland and Wales the power to set (and slash) their own corporate rates.
• It’s time to stop talking about infrastructure investment and actually do it – but in the regions. The latest National Infrastructure Plan shows the Chancellor plans to invest over £2,500 per capita in London and the south east of England compared to a meagre £150 in regions such as the north of England. Orborne should steal Labour’s clothes and create regional infrastructure investment banks.
• Alter the Bank of England’s remit to prioritise employment as well as price stability. Or is that what Sir Mervyn wanted all along?