Gordon Brown backtracks on further fiscal stimulus
Two events conspire to force a change of heart – the Mervyn King warning and yesterday’s disastrous sale of Treasury gilts
Gordon Brown, in danger of going out on a limb with a plan to blow more money on getting Britain out of recession, has suddenly backed away from advocating any further 'fiscal stimulus' after pressure from two quarters.
First there was the Bank of England Governor Mervyn King's very public - and controversial - warning on Tuesday that the Government simply could not afford a further spending spree, and that the upcoming Budget on April 22 should not include tax cuts and public spending increases.
Second, clearly alarmed by King's warning, City investors, for the first time since 1995, declined yesterday to buy the full compliment of gilts offered for sale at one of the Treasury's official auctions. The message was clear: there are growing fears that Britain may not be able to repay the billions of pounds in debt it has been amassing in its bid to rescue the banks and revive the economy. If things go too far, Britain could end up going begging to the IMF.
George Osborne, the shadow Chancellor, said: "The failed gilt auction... should be of real concern to everyone. It is too early to say, but the risk is that at some point the Government will not be able to fund its huge debts."
Brown, speaking in New York, did a swift about-turn and said he had no plans to add to the £20bn fiscal stimulus announced by Chancellor Alistair Darling last autumn, saying there were other "effective and quicker ways" of kick-starting demand, by which he meant the programme of 'quantitative easing' - the printing of more money - being overseen by King.
For Brown's detractors, the apparent volte face adds to the impression of a government in crisis. Vince Cable, the Lib Dems' Treasury spokesman, said: "The open warfare breaking out between No 10, the Treasury and the Bank of England over the need for a further fiscal stimulus is clearly spooking the markets. If there is one lesson the government should have learned by now, it is that creating uncertainty is economic masochism."
Brown has been under pressure from abroad, too. Mirek Topolanek, the Czech prime minister, who holds the presidency of the European Union, said plans by Britain and America to borrow cash to fund their economic recovery plan were a "way to hell".
WHAT ARE GILTS?
Gilts, or gilt-edged bonds, are financial instruments issued by the Treasury to fund Government borrowing. Investors receive an annual rate of interest. Traditionally, they are regarded as one of the safest forms of investment and Treasury auctions are normally oversubscribed.
WHAT THEY ARE SAYINGGerald Warner, Daily Telegraph: Mervyn King... has holed Brown below the waterline. Yesterday's failure of a government bond auction, the first such raspberry blown at the Treasury since 1995, showed that when investors are making a serious decision they listen to the guv'nor in Threadneedle Street, not to the flannel merchant in Downing Street. King has warned the Prime Minister (and, immediately afterwards it seems, the Queen) that the Government simply cannot afford to incur more debt. ·
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