Osborne draws on bank of economic credibility
For two years, George Osborne claims he has been banking economic credibility. On Thursday night at the Mansion House, the chancellor made it plain he is about to start spending it.
With Britain languishing in recession and pressure mounting on all sides for the chancellor to come up with a more aggressive growth strategy, Mr Osborne finally played his hand.
The result was a support programme for the UK economy which the Treasury believes could top £100bn, a package intended to tackle the economy’s present woes and act as an insurance against a possible eurozone meltdown.
A £5bn monthly liquidity injection is intended to keep banks functioning and a new “funding for lending” scheme is supposed to support £80bn of cheaper credit. More quantitative easing could be on the way.
Mr Osborne’s message to his City audience was clear: the Bank of England can only operate this ambitious emergency support operation because of the credibility that he has built up that Britain’s public finances are sound.
“In May 2010 the UK’s cost of borrowing tracked Italy and Spain; today Spain’s borrowing costs hit a record 7 per cent, Italy is borrowing at more than 6 per cent, while our 10-year gilt rates are just 1.7 per cent,” he said.
The Mansion House plan
– A new ‘funding for lending’ scheme, operated by the Bank of England, intended to underpin £80bn of cheaper loans to businesses and households
– A £5bn-a-month emergency BoE liquidity scheme to help banks obtain low-cost cash
– A new requirement for the BoE’s new Financial Policy Committee to target growth as well as stability. Mr Osborne said he did not want ‘the stability of the graveyard’
“The credibility we have enables us to do a great deal more than some other countries at present.”
This mix of tight fiscal policy and active monetary policy was described by Sir Mervyn King as a “textbook response”; but Labour will ask why it has taken the Treasury and BoE so long to put this package together.
The aggressive use of the state’s balance sheet – both by the Treasury and BoE – was agreed by senior ministers in early May in response to Britain entering a double-dip recession.
Last month Nick Clegg, deputy prime minister, told the Financial Times the government would take on some of the risk on housing and infrastructure projects to unleash a “massive” wave of new investment. Details are expected shortly.
We are not powerless in the face of the eurozone debt storm
– George Osborne
The BoE’s intervention was hailed by Mr Osborne’s team as “the first flush” of the new approach of using a solid balance sheet to bolster the economy; the eurozone crisis has precipitated it.
“It is increasingly clear the impact of the eurozone crisis is tightening financial conditions and leading to higher funding costs for banks,” said one ally of the chancellor. It was also “an insurance policy” against further eurozone trouble.
Ed Balls, shadow chancellor, believes that monetary activism is not enough. He believes Mr Osborne must drop Plan A and scale back his fiscal tightening to push money directly into the economy.
He reacted to the speech by saying: “The governor is now recognising what the chancellor still refuses to – that urgent action to stimulate the British economy is needed now that we are in a double-dip recession.”
“The Bank of England’s new funding for lending scheme is a significant admission that the government’s existing policies have failed. Businesses will be desperately hoping it is more successful than George Osborne’s Project Merlin and credit-easing schemes, which have actually seen net lending to businesses fall.
“But when the biggest problems in our economy are a lack of confidence and a lack of demand, these proposals from the Bank of England do not go far enough. We need a change of course from the government on fiscal policy too. A credible and balanced plan for jobs and growth that gets our economy moving again and people back to work is the only way we will succeed in getting the deficit down. And without urgent action now Britain will pay a very heavy long-term price.”