Cameron and Osborne are not for learning. King should know better.

by Jonathan Todd

“Is not the lesson from the noble Baroness Thatcher that, when you have set an economic course, you should stick to it – ‘there is no alternative'”?

So asked Jacob Rees-Mogg at PMQs recently. The IFS cautions “a Plan B might be needed, potentially involving some reduction in the size and pace of cuts in the structural deficit”. But David Cameron knows best. He did not demur from the insufferable Rees-Mogg.

But for what did Thatcher think the grinding unemployment and dislocation of the 1980s was a price worth paying? Low and stable inflation. The NUM was, she thought, the enemy within and the wage/price spirals of the 1970s were part of the damage they wrought. She was right that high inflation is no basis for a dynamic economy. But her policies didn’t deliver this. In his memoirs, Nigel Lawson concedes that he should have raised interest rates in 1986. Instead, with a general election looming, he offered tax sweeteners. Inflation topped 8 per cent by 1988.

It wasn’t until Labour took politics out of monetary policy by making the Bank of England independent that the inflation dragon was slain. Now politics is back at the Bank and so is inflation. Not that Mervyn King’s grovelling praise for George Osborne’s ideologically-driven deficit reduction strategy has caused inflation to be persistently above target. But that that is not his job. The governor’s remit is to run monetary policy to defend this target. It isn’t to provide cover for Osborne’s politics.

The George and Mervyn show threatens to reprise the Ken and Eddie show, that 1990s classic. In the governor’s defence, the role afforded to him in this show reduces him to a bit part. It must be tempting to seek relevance by commenting from on high on fiscal policy. This used to work for Vince Cable.

King has been so reduced because four times he has written to Osborne to explain why inflation is above target and four times replies have been sanguine. Nominally, Osborne continues to set a target for King. But does Osborne really want King to take the steps necessary to meaningfully defend this target? Of course not. But how can Osborne be unmoved by hard working families seeing ever more of their modest wages – no higher now in real terms than they were in 2005 – stretched ever further by the weekly shop?

Because Osborne sees nothing besides what is needed to continue in government. To which the successful execution of his deficit reduction strategy is central. Osborne wants to be able say that he applied the tough medicine that the patient needed after getting drunk with the Labour rogues; and that the medicine has worked so well that the patient can now be afforded some tax sweeteners.

It stretches credulity that things will go this smoothly. Osborne’s plans require, as Liam Byrne has noted, record export and business investment performance in each of the next three years. Do you feel like you are living in a record breaking economy? We might be breaking records for youth unemployment and for length of time above inflation target. But, with the rest of the EU hardly best placed to suck up our exports and consumer confidence shrunken, exports and business investment seem unlikely to break the records Osborne seeks.

Things would be even less likely to go to plan had King acted to retain credibility in the target that Osborne purportedly wants him to defend. This would have meant following the recommendation of Andrew Sentance, a member of the monetary policy committee (MPC), and to have already begun raising the interest rate. Obviously, this hasn’t happened.

Mike Wickens, an economics professor at York University, “suspects that behind the scenes the chancellor has indicated that he doesn’t mind the Bank not keeping to its remit”. No shit, Sherlock. And, yet, as obvious as this seems, it remains shocking. The target is drained of credibility and the Bank sapped of independence on the altar of Osborne’s general election quest.

Yes, much of our inflation is imported (although, this is partly a consequence of a deliberate strategy on the part of the government and the Bank to allow the pound to drop in value to make our exports more competitive, which has had limited effect to date). And, yes, fiscal tightening (cuts) would still be happening if Labour were in government, which makes it more problematic than it otherwise would be for the Bank to be taking the actions required (raising interest rates) to defend the target. It would, however, be less problematic for the Bank to do so in the context of Labour’s fiscal consolidation than the government’s programme. This is because Labour’s cuts would have been less deep and fast than those of the government.

While our deficit reduction strategy would make it easier for the governor to do his job, we don’t need his endorsement. What the nation needs is for him to stay out of politics and do his job. Unless and until he admits that he is already redundant.

The real lesson of history is that low and stable inflation is hard won. It shouldn’t be squandered on something as squalid as Osborne’s election strategy.

Jonathan Todd is Uncut’s economic columnist.

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2 Responses to “Cameron and Osborne are not for learning. King should know better.”

  1. Ed says:


    High inflation and a relatively lower government debt that needs to be paid back.


    Lower inflation and a relatively higher amount of government debt that needs to be paid back.

    Either way the average citizen of the UK gets screwed… Ultimately we’d have been better off not getting into this mess in the first place.

    It should come as no surprise that King and the BOE aren’t truly independent of government or at least uninfluenced by their wishes.

    If they were then during the Blair/Brown years they would have raised interest rates to put the squeeze on the UK’s spiralling private debt and control housing prices.

    That would however had the knock on effect of stalling house prices and economic growth… I’m sure that would have gone down a storm at No. 10 and King would without a doubt have been looking for a new job!

  2. william says:

    Mr. Todd,Labour has no chance of winning the 2014 election,without admitting the disastrous mistakes made by Gordon Brown,and his associated team,New Labour 2(EM , Balls).From 2000, public expenditure was pumped up to an unsustainable level(the electoral cycle game),a debt fuelled property boom took place(producing one off tax revenues),the banks were out of control(courtesy of Brown’s disastrous reforms),and then in August,2007,the interbank markets froze(they did not want to lend to RBS or BoS, they were right).Down goes the exchange rate(surprise,surprise).Subsequently,in a Libyan type moment,the author of this drama announced he had saved the world.Before May,2010,King had decided that,his brief was inflation control, but ,tacitly,saving the entire banking system by flooding the markets with liquidity was more important.Result,INFLATION.Osborne arrives.King tells him ( some months before)there will be a gilts strike(1976,Healey), unless credible policies are put in place.These new policies still involve an INCREASE in government expenditure, albeit at a reduced rate.In due course, we will have our 1981 moment, a letter to the Times from 450 economists saying it was all wrong.Fortunately, they will be wrong again,the economy will pick up a lot in 2013,and yes there will be income tax cuts in 2014.Unlike Tony Blair from 1995,New Labour 2 are,to put it politely , behind the curve,or, more simply,in denial of history.

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