Former Bank of England governor Mervyn King has warned Andy Burnham and other UK prime ministerial contenders that they cannot go around the financial markets to boost spending.
Speaking to The National's Inside Brief, Mr King, who sits in the UK House of Lords, responded to Mr Burnham's suggestion that the country's leadership should not act “in hock” to the bond market. A political crisis for Prime Minister Keir Starmer less than two years after taking power has led to Mr Burnham's bid to return to parliament in the hope of taking the top role.
“What the bond markets want is an economically credible path for policy which is politically supported,” Mr King said. “If there is any change, the potential successors to the current team will have to be very clear about what their economic programme [involves].”
With the spillover from the Iran war set to boost inflation and lift interest rates, the UK gilt market has led to governments being charged more for their debt.
The focus on Mr Burnham has been exacerbated by his comments about the restraints on spending and a suggestion defence investment could be executed outside the current ruling framework.
Mr King cast doubt on whether the “in hock” jibe was a considered remark from the former Labour cabinet minister-turned-mayor of Greater Manchester.
“If he were to become Prime Minister, he would not be repeating that comment,” Mr King said. “Can the government explain what's needed to be done? It's either cuts in spending or higher taxes. There's no way around that choice.
“Pretending otherwise, financing investment through off-balance-sheet schemes is a gimmick, and you've got to confront the reality here,” he added. “It's not easy, that's true.”
Schemes for growth
Mr King was at the Bank of England for 23 years, culminating in a decade-long term as governor during the global financial crisis before giving way to Mark Carney, who is now Canadian Prime Minister.
Still an active commenter on the economic system, Mr King views government debt in the UK and its peers as perilously high for the level of taxation that leaders are willing to impose.
“The concern in bond markets is that there seems to be, at least in the major economies, a deep political reluctance to confront the challenge of ensuring that public debt is on a sustainable path,” he said. “By a sustainable path, I mean that in normal times the ratio of debt to GDP or national income should be gently falling.
“What's lacking somehow is a government that is willing and feels able to give a story, or a narrative, to its population to say 'you know, this is the state of the nation. We have to deal with our debt problems. There are many things that we might like to spend money on and we've got a choice. If we do spend money on these things, fine, then we must raise taxes to pay for it. And if we don't want to raise taxes, then we have to cut spending.'”
With his own experience of the debt crunch in 2008-2009 and then as an observer of interventions in 2020 after the Covid crisis, he worries about the failure to improve the situation when interest rates are “very close to zero”.
The closure of the Strait of Hormuz and uncertainty over when the war will end comes at time when the credibility of central bank intervention has already taken a hit. Under Mr King's watch, the Bank of England had “looked through” imported inflation but he wonders if it could do so after the Covid price spiral.
Speaking of his successor's position in relation to the war, he warned of an outlook still mired in uncertainty.
“I think the biggest problem … is that we don't yet know how this Middle Eastern situation will be resolved, or the timescale for it,” he said. “The impact on oil prices and other prices, like food prices, through fertiliser prices, will be very different if the conflict continues for another week, month, six months longer.”
Hard-to gauge-timescales of the pressure feeding through muddied the picture for already beleaguered central banks, he added, especially after the UK double-digit experience of the Covid impact. “It's harder for the Bank of England today because they've been through a period when inflation reached 11 per cent,” he said.
Main mandate
One sliver of hope for a reset for Mr King is that the installation of Kevin Warsh at the US Federal Reserve brings to end a period of experimentation by central banks. Speaking from personal experience of the incoming president, he said Mr Warsh can bring the institution with him as he makes changes to its approach.
“I'm sure he will feel he wants to make changes to the institution because the Fed has got itself into some difficulty in the last few years,” he said. "[It] adopted an academic doctrine that led them to a path of higher inflation, led them to pretend that they could forecast, or say, where interest rates are likely to go one, two, three years from now.
“I'm sure those things will ultimately change and I'm sure he'll want to look again at the size of the balance sheet.”
