The Bank of England Governor Sir Mervyn King threw the Chancellor, George Osborne, a vital political lifeline last night as he said it would be “acceptable” for the Government to miss its debt-cutting target due to slowing global growth.
In his first-ever live television interview, Sir Mervyn faced questions on the Coalition's target of putting public debt as a share of the economy on a downward course by 2015/16.
The Chancellor predicted in this year's Budget that debt would peak at 76.3 per cent of GDP in 2014/5 before beginning to fall back, but is in grave danger of missing this target due to a far slower recovery than forecast by the independent Office for Budget Responsibility.
Figures today are set to underline the impact of the shortfall with more than £20bn in borrowing during August. Borrowing is running nearly £10bn ahead of last year in the first four months of the financial year so far.
When asked whether he was "more relaxed" about missing the debt target, Sir Mervyn told Channel 4 News: "If the economy is growing slowly then, yes, indeed and that was always part of the plan. If [missing it] is because the world economy has grown slowly, so we in turn have grown slowly, then it would be acceptable to be in that position, yes."
He added: "If the world economy were to pick up and we could grow quickly then it would not be acceptable to miss it – if we had no real excuse for it."
Sir Mervyn King has insisted there were "a few signs" of recovery in the British economy, although he avoided using the dreaded "green shoots" phrase. But he warned that any recovery would be slow and that the crisis in the eurozone had cast a "black cloud of uncertainty" over businesses around the world.
"What it (British recovery) will depend on critically, I think, is what happens in the euro area and also the rest of the world," he said.
"The United States is struggling a bit, Brazil and China are slowing. I think our fate in terms of the speed at which we come out of the flat period we're in will depend very much on what happens in the rest of the world."
The Bank of England is midway through a four-month programme of £50bn in money-printing via quantitative easing to boost demand in Britain's recession-hit economy.
Most economists expect the Bank to approve a further £50bn in November, which would take total quantitative easing to £425bn since March 2009.
Minutes to September's meeting of the central bank's Monetary Policy Committee showed that one official – likely to be dovish David Miles – already saw a good case for more stimulus, and that others thought it likely that more would be needed in due course.
Sir Mervyn cautioned the Chancellor not to water down the proposals for reform of the UK's banks proposed in Sir John Vickers' review.
He said the original proposals were "in the right direction" and asked whether the banks would face less stringent conditions on how they fund themselves.
He said: "The banks have lobbied for it, and we'll see what happens when it goes to parliament – you can see why they have lobbied for it. There are very rates of return to pay high bonuses and if it goes wrong, the burden falls back on the taxpayer."