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Governor and PM disagree over fiscal stimulus

The Governor of the Bank of England, Mervyn King, has stated that the country’s debt is such that a further fiscal stimulus, thought to be favoured by the Prime Minister, is not possible.

Governor King made his comments, reported by the BBC, whilst being questioned by the Treasury Select Committee.

The Government announced a fiscal stimulus late in 2008, with the primary measure taken being a moderate cut in VAT, from 17.5% to 15%.

However, the price of fuel, alcohol and cigarettes remained constant as the duties on the above items were increased by an amount equal to the VAT cut. The additional duty will remain once VAT reverts to 17.5% at the end of this year.

King’s statement will not be welcomed by the Government, and was made on the same day as the official inflation rate surprised most forecasters by rising to 3.2%, well above the Bank of England’s target rate of 2%.

It presents a significant problem for the PM, with the Daily Mail’s political editor Ben Brogan describing it as a ‘bombshell’.

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