MERVYN KING got his excuses in early this week. As the British economy loses momentum, with no obvious help in sight, it was the Governor of the Bank of England who delivered the time- honoured message: “Don’t blame me, guv”.
CBI members who heard him speak at Gateshead will not have been cheered, however convivial the rest of their after-dinner entertainment. The upturn in oil, commodity and latterly import prices is rapidly slowing the growth of output, but it is also stirring inflation. The job of the Bank of England, the Governor emphasised, is to keep inflation low and stable, not to keep the economy running at near to full capacity. Not having to worry about inflation helps business to deliver steady growth, but that is not the Bank’s priority.
Aside from trying to avoid the blame that continental politicians have heaped on Jean-Claude Trichet, President of the European Central Bank, Mr King’s depressing analysis appeared to have two targets. The first is pay-setters and pay-bargainers. The second is his own colleagues on the Monetary Policy Committee (MPC).
The Governor wants to dampen inflation expectations in the new circumstance of prices being pushed up by external factors. The Bank will not accommodate the oil effect, so do not try to recoup purchasing power through pay claims.
Remember also that the Governor was in the minority when the MPC cut the Bank’s interest rate in August. He does not want his colleagues to repeat what he sees as the error of mistaking weak demand for potential deflation.
The Organisation for Economic Co-operation and Development (OECD) agrees. Although its latest report sees UK output growing at half the rate that the Chancellor assumed in the spring, it sees no compelling case for cheaper money. But this is only one side of the argument.
In the past few years, buoyant demand has allowed the Bank to err on the side of caution to curb inflation expectations. Prices have therefore generally risen a little below target. That comfort is no longer available. To play a responsible role, the MPC should take more risk of inflation being above target than below, provided it stays within the limits set.
The OECD is being consistent. It has argued that the UK economy is near to capacity and should slow. But the Bank and the MPC thought recently that migrant labour was boosting the economy’s capacity to grow without inflation.
Either way, the MPC has relatively little room for manoeuvre. If demand needs a boost, business should look to the Treasury, not the Bank.
On a monetarist view, that should just mean automatic stabilisers. When output slows, tax revenues weaken and welfare payments rise. On an interventionist view, as practised with apparent success by the Bush Government, taxes can be cut or public state investment can be brought forward to boost output and consumer demand.
CBI members will not have needed long to realise that Gordon Brown can barely afford to let the automatic stabilisers operate, let alone cut taxes. Like the governments of Germany, France and Italy, he has used the good years to boost public spending and employment, not to balance the books and create room for tax cuts when needed. Since the prudent years before the 2001 election, Mr Brown has pushed public spending to 44 per cent of output, diluting productivity gains made in the private sector. Like many others, the OECD reckons that the Chancellor needs to raise taxes, probably by 1 per cent of national income, to maintain Britain’s financial credibility, let alone meet EU targets.
Business cannot look to the world economy for support either. The core of the eurozone, our biggest market, is in a tighter corner than we are. The UK should win its share of business in oil-exporting countries, but world trade is likely to slow.
If the UK economy is to be revitalised, therefore, it will be by its own efforts. Business should be pressing Mr Brown to bring in the kind of reform programme that he is constantly prescribing for our continental neighbours. It could start with a freeze on net public sector recruitment, the first step to easing the drag on productivity.
The scope for deregulation and competition is huge if priority is given to growth, rather than fairness or consumer protection. Life assurance companies, for instance, are so scared of mis-selling that they hardly dare market products for ordinary people. Most selling rules for financial services could easily be scrapped in favour of classifying products by risk.
Many of the biggest UK companies are utilities. Yet most are regulated with the aim of shrinking their sales, hobbling their potential for growth. These policies can be scrapped.
Sectors competing with public services such as the NHS, schools and state-funded universities should be encouraged, instead of harried. Pharmacies could be freed to take the strain off doctors by selling more drugs. Even legalising narcotics, if socially acceptable, could create honest new business.
To boost growth, business needs to take more risk. Government can help. It can scrap joint and several liability, so that business and directors are liable only to the extent that they are to blame for mistakes.
A French approach to industrial policy can also reassure companies that they may get another chance if they take more risks to boost investment. Ministers should co-ordinate supportive shareholder groups.
Most of all, any public policy initiatives on energy, food, health or environmentally-friendly vehicles should be designed to involve, promote and favour UK service companies and manufacturing. Within EU rules, it should aim to create new UK business and bring business back to UK suppliers.
Growth has become even more vital to support an ageing population. The Governor may deny responsibility. The rest of us cannot.
graham.searjeant@thetimes.co.uk
