King plays down Budget spending boost

Bank of England Governor Mervyn King today played down the chances of any further spending boost to aid an ailing UK economy in next month's Budget.

Chancellor Alistair Darling introduced a £20bn stimulus package last November, but Mr King said the Government would be "cautious" over further moves with public finances under even greater pressure from falling tax revenues and higher benefit payouts.

He told MPs: "Given how big those deficits are, I think it would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits."

Mr King did not rule out "targeted and selected" measures on specific areas such as unemployment, which hit 2 million last week and could top 3 million by the end of the year.

But he added: "The fiscal position of the UK is not one which says 'Let's just go on another significant round of fiscal expansion'."

Mr King's comments come two weeks after the Chancellor himself dampened hopes of further stimulus measures for the economy.

The Governor said monetary policy - through interest rates at record lows and the latest move to pump £75bn in newly-created money into the economy - should "bear the brunt" of bringing the UK out of recession.

He told the Treasury Select Committee he expected that a combination of the rate cuts and boost to the money supply, the falling value of the pound, and firms returning to production after running down stockpiles would help return the UK to growth.

But he added that fixing the woes of the banking system was pivotal to restoring the UK's economic health with many companies starved of credit.

Lib Dem John Thurso (Caithness, Sutherland and Easter Ross) said there was a "clear disconnect" between the desire "at the top" for money to reach small businesses under Government initiatives and what firms were telling them "on the street".

Mr King said: "I totally accept the comments that you have been hearing as you make your regional visits are very similar to the comments we've been hearing from our agents and that suggests we are still waiting for signs of improvement."

The Governor said he hoped for easing credit conditions in the coming months following recent lending agreements with several banks, in return for taxpayer-backed insurance of hundreds of billions of pounds worth of "toxic" assets.

"That's something we'll want to monitor very carefully," he added.

The Governor's caution over a second round of fiscal stimulus measures followed a call from former cabinet minister Stephen Byers for the Chancellor to abandon the centrepiece of his November package - the temporary cut in VAT to 15 per cent.

Mr Byers, who originally supported the move, said in an article on the Progress website: "I do now question whether it has run its course both in terms of its overall benefit to the economy and in relation to the political return that comes to the government."

Shadow Chancellor George Osborne said the comments of both men were "a defining moment in the political argument on the recession", which vindicated the Conservatives' stance and left Prime Minister Gordon Brown isolated.

He said: "The big debate in British politics about the recession has been whether or not the country could afford a debt-funded fiscal stimulus. When the Conservatives opposed the VAT cut last Autumn, Gordon Brown said we were alone.

"Today, not only has a former Labour cabinet minister attacked the ineffective VAT cut, but the Governor of the Bank of England no less has said Britain cannot afford a further fiscal stimulus.

"He goes on to say that monetary policy should be the main tool to tackle the recession. This is hugely significant."