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BoE chief to Darling: it’s time to make cuts

January 20, 2010 | "The Times"

Mervyn King said that the patience of Britons was likely to be 'sorely tried' over the coming years

The Governor of the Bank of England piled pressure on the Chancellor to specify sharp spending cuts in his March Budget or risk a damaging backlash from the markets.

Mervyn King said that the patience of Britons was likely to be “sorely tried” over the coming years, with pay stagnating and inflation threatening to rise above 3 per cent. Britain’s economic health hinges on Alistair Darling being open about how he intends to slash the £178 billion deficit, he said.

A leading credit agency warned yesterday that the Treasury’s plan to halve the deficit within four years was too slow.

Lord Mandelson, the Business Secretary, also underlined the high stakes involved in the pre-election Budget. He warned that Britain, along with the rest of Europe, faced a phase of “rapid relative economic decline” if governments failed to cut spending.

The warnings came as it emerged that the annual inflation rate rose from 1.9 per cent in November to 2.9 per cent in December — the biggest monthly rise on record and well ahead of the Bank’s target of 2 per cent. Analysts said that much of the change was due to base effects from events in December 2008, such as the cut in VAT from 17.5 per cent to 15 per cent.

Mr King said that the Bank believed that the surge was temporary and that inflation would slow in the coming months, but the news prompted a rise in gilt yields, pushing up the interest the Government pays on its debts.

Mr Darling told The Times that, if re-elected, Labour would be announcing the toughest cuts for 20 years before the end of this year. He said that uncertainty in the global economy meant that it was difficult to set detailed budgets now but that “we will have to fix departmental budgets beyond 2010-11 by the end of the year”.

His words mean that a spending review would have to take place almost immediately after the election.

Ministers are to be told this week to propose ideas for cuts, likely to amount to 17 per cent in areas outside health, education, police and overseas aid. He has won a Cabinet battle to be more open about the cuts that will be needed after the election, which has pleased Mr King and Lord Mandelson.

The Chancellor is looking forward to figures next week that are expected to confirm that Britain has emerged from recession. However, statistics today will point to a jobless total that has risen closer to 2.5 million, while official figures tomorrow will show that public borrowing hit £18 billion in December — £5 billion more than that borrowed in December 2008.

Fresh questions over Britain’s creditworthiness were raised by Fitch, one of the three agencies that assess the Government’s creditworthiness.

Brian Coulton, UK analyst at Fitch, said: “We think the current plan to halve the deficit by 2014 is too slow. The Government will still have a deficit of 9 per cent of GDP in 2011, when the economy is recovering. This is too big. Post-election we will be looking for a stronger and more credible medium-term plan to reduce the UK’s budget deficit.”

Fitch has warned that if the Government does not pursue a more aggressive programme of cuts after the election then the the UK’s triple-A credit status would be threatened.

Standard & Poor’s, another credit ratings agency, has already amended the outlook for Britain’s credit rating from “stable” to “negative”.

Philip Webster, Suzy Jagger and Gráinne Gilmore

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