Mervyn King’s view on ‘the new politics’

Coruscating words from the Governor of the Bank of England Mervyn King about the immediate need for spending cuts in this financial year, in the coming months.

The Chancellor of the Exchequer George Osborne spoke this morning to Mr King to talk him through the joint policy Agreement of the new government. There are some important developments.

First and foremost, Mr King has backed the Conservative plan for £6 billion of cuts in the coming months. This provides some political cover for Vince Cable and Nick Clegg’s harsh statements against this policy in the election campaign.

Mr King has also shifted his position a little, but he says this is a direct result of the turmoil in European government debt markets over the past two weeks. Mervyn King thinks the risks have changed fundamentally given this turmoil and we have a brief window of opportunity to hammer home the UK’s fiscal credibility to the markets.

Some of the statements made by Mervyn King were his harshest yet and presage ‘a few painful years’ as we are only ‘half way through the financial crisis’. King believes that what was unleashed on sovereign debt markets last week had the potential to be a ‘much worse’ crisis than we had in 2008.

I understand that the Financial Services Authority may well have been removed from death row. The Bank of England will be responsible for macroprudential policy, i.e.’big picture’ financial stability, and it will have ‘oversight’ of microprudential policy, i.e. actually regulating banks.  

That, to me, means that despite harsh word from George Osborne, the much-maligned, though much-improved financial regulator stays. Another victory for the Lib Dems.

And there has been much speculation that health spending is no longer ringfenced. I was categorically told that health spending will increase in every year of this parliament by a Treasury source, about an hour ago. Yes, in real terms. But I can see the motivation from Osborne in losing this policy that was designed to show how cuddly the new Tories are. Surely the cuddliness factor is now provided by the men in the yellow ties.

Half the so-called ‘jobs tax’ will stay to fund the Lib Dem income tax cut (rise in thresholds). Treasury insiders say that all the jobs tax has been ‘stopped’ because of the neutralisation of the employer NICs rise.

The Conservative campaign website clearly indicates that the employee NICs is also part of the ‘jobs tax’, but that will not be ‘stopped’. That’s a £4bn Labour tax rise spent on a £4bn Lib Dem tax cut, enacted by a Tory Chancellor.

Welcome to the new politics.