The Governor of the Bank of England today fired a warning shot at the Government over taking any further tax and spending measures to try to jump-start the economy.

In a clear signal to the Chancellor that he doubts whether a second so-called "fiscal stimulus" can be afforded, Mervyn King told the Commons Treasury Select Committee: "I am sure the Government will want to be cautious in this respect. There is no doubt that we are facing very large fiscal deficits over the next two to three years."

The Governor said that the Government had little choice but to allow the steep surge in public borrowing triggered by the recession. Borrowing is set to breach the Chancellor's £118 billion forecast for the 2009-10 financial year, forcing big revisions to his plans in next month's Budget.

"We are going to have to accept for the next two to three years very large fiscal deficits," Mr King said.

But he suggested that even higher borrowing as a result of an extra Budget stimulus of tax cuts or more spending would not be affordable.

"The fiscal position in the UK is not one that would say, 'Well, why don’t we just engage in another significant round of fiscal expansion?’."

He added that he believed that the brunt of further action to buoy the economy should come from monetary policy, in the form of the Bank's quantitative easing strategy of 'printing money' as well as record low interest rates, now at just 0.5 per cent.

But Mr King added that he was encouraged by the initial impact of the Bank’s “quantitative easing” strategy — the programme had started successfully, with the Bank so far purchasing about £10 billion worth of assets.

Mr King said this would directly boost the supply of money in the economy — although the eventual effect would still depend on the ability and willingness of the banks to increase the size of their balance sheets.

He added: “It is only two or three weeks into the scheme but we are mildly encouraged by what we have so far seen.”

Asked by Conservative MP Sir Peter Viggers whether inflation would rise “as night follows day”, due to quantitative easing, Mr King replied: “That scenario is never too far down the road not to worry about it, which is why it is important that we stick to a clear inflation target. That is the anchor everyone should hang onto.”

Mr King said the Bank had settled on £75 billion as the appropriate figure for the initial cash injection into the economy because it was equivalent to about five per cent of nominal demand in the economy — but said it was hard to know when this would be enough.

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