Three in a bed: will Gordon roll over?

The Prime Minister's hopes of saving the world economy are running into trouble at home. Step forward Mervyn King and Alistair Darling

Conspiracy theorists could have had a field day as Meryvn King slipped into Alistair Darling's Commons office off a corridor behind the Speaker's chair at 4pm yesterday – especially as Gordon Brown was 3,400 miles away in New York.

A day earlier, the Governor of the Bank of England had constrained the Chancellor's room for manoeuvre in next month's Budget by warning against another big fiscal stimulus. Yet the chatter on the Whitehall grapevine yesterday was that Mr King had strengthened Mr Darling's hand in his arm wrestling with Mr Brown over the scale of any spending boost in the Budget. The Chancellor and the Prime Minister have not fallen out yet – only, perhaps, because they have shelved their talks on the 22 April Budget until after the G20 summit of world leaders in London a week today.

The word is that Mr Brown, desperate to pull Britain out of recession sooner rather than later, is more in favour of giving the economy another boost than his cautious Chancellor, who is already worried he will have to raise his £118bn borrowing forecast for 2009-10 because the downturn will be longer than he predicted in November.

MPs believe the Budget was delayed – it will be the latest in a non-election year since 1945 – in the hope that the G20 meeting would back calls, led by President Barack Obama, for all the major economies to adopt a further fiscal stimulus. Such a declaration might give Mr Darling the much-needed cover to add to the £20bn stimulus he announced in his pre-Budgetreport in November.

If that was Mr Brown's strategy, then it has been blown off-course. European countries, led by fiscally-prudent Germany, do not want to consider another "splurge" until they have seen whether their existing plans to spend their way out of recession work.

The timing of Mr King's remarks on Tuesday to the Treasury Select Committee could hardly have been more damaging for Mr Brown. Soon afterwards, the Prime Minister called on the world to launch its biggest-ever fiscal stimulus when he addressed the European Parliament in Strasbourg.

Yesterday, some Brown allies were seething about the Governor's remarks. "He has crossed the line," one said. "His remit is monetary, not fiscal policy." Eyebrows were also raised at the Treasury, even though some senior officials privately welcomed Mr King's unexpected public intervention ahead of the Budget. The suspicion among Labour MPs is that Mr King was trying to divert attention away from the Bank's embarrassing performance in missing its 2 per cent inflation target on the day the consumer price index rose to 3.2 per cent. Officially, No 10 wants to be seen to be relaxed about the Governor's remarks. Officials insisted that it was not a deliberate act of sabotage, as his long-arranged appearance before theTreasury Committee happened to coincide with Mr Brown's speech in Strasbourg.

Indeed, the Government machine went into overdrive yesterday to deny splits between Mr Brown and Mr King, between Mr Darling and Mr King, and between Mr Darling and Mr Brown. With the financial markets in a permanent state of jitters, the last thing the Government needs is the suspicion that the people who set economic policy are divided among themselves.

Treasury insiders said the Chancellor had not decided against a further stimulus to the economy, and pointed out that the Governor had not ruled out targeted action in the Budget. That could mean, for example, a boost for schemes to get the unemployed back into work and building projects such as roads and housing.

One government source said last night: "Alistair Darling was always going to be considered and measured in the Budget. But Gordon Brown is on the same page. They are not splurge-merchants." Some inside No 10 had begun to play down speculation about a second stimulus before Mr King launched his pre-Budget strike.

Despite the denials, the triangular relationship seems strained. On the question of a further stimulus, the Chancellor and the Governor appear to have more in common than either man does with the Prime Minister. According to some in Whitehall, the real tension is between Mr Brown and Mr King, with Mr Darling caught awkwardly as piggy in the middle.

The Budget was not on the agenda when Mr King met Mr Darling yesterday. In fact, the 90-minute session involved another triangle – the one responsible for financial regulation, composed of the Treasury, the Bank and the Financial Services Authority (FSA). Also present was Lord Turner of Ecchinswell, the FSA chairman, whose blueprint for the future of financial regulation will be pushed by Mr Brown at the G20 summit. The meeting was described as "friendly, routine and serious".

As he continued his 17,600-mile, pre-G20 tour of three continents in five days, Mr Brown must have been wondering whether he is cursed every time he leaves the country. The last time he travelled to America, to meet President Obama, Mr Darling caused grief by calling on the Government to show more "humility" and accept its share of responsibility for Britain's economic problems.

There was some good news for the Prime Minister on his current trip as President Obama came out fighting for a further global economic boost in a Washington press conference. That tipped the see-saw G20 argument back in Mr Brown's favour, to the relief of the aides travelling with him.

President Obama said it would be unfair to expect those countries taking extraordinary measures to lift up those that were not. In a letter published in newspapers around the world, he called on G20 leaders to "take bold, comprehensive and co-ordinated action that not only jump-starts recovery but also launches a new era of economic engagement".

However, at a breakfast with Wall Street bankers hosted by The Wall Street Journal yesterday, Mr Brown found himself questioned not about the President's words but those of his Bank Governor. He replied carefully: "What the issue is, actually now, is whether we are prepared, given what happens over the next few months to do what is necessary to resume growth in the economy and I think if you put that question to Mervyn King, he will say as he said when he signed the G20 [finance ministers'] communiqué – that we have got to be ready to take the action that is necessary to restore growth."

The Prime Minister saw "consensus, not a disagreement" on the need to take extra measures to boost economies, but he took a diplomatic approach and said the G20 summit would set international principles for national action. "No one is suggesting governments should come to the G20 and put on the table the budget they are going to have for the next year."

Mr Brown remained resolutely upbeat about the chances of getting sweeping changes agreed by the world's largest nations. Yes, there could be a global trade deal. Yes, there would be a whole new way of propping up emerging economies, without subjecting them to the austere oversight of the International Monetary Fund. Yes, there could even be a deal to rein in bankers' pay.

A sceptical Henry Kissinger, the former US Secretary of State, rose to ask how it could all be done in a day. But the sweep of Mr Brown's ambition was not to be curtailed. "We are building for the first time, not just a global economy but a truly global society." The credit crisis, he repeated, would be seen as a mere hiccup in the progress of globalisation, as the world financial system adjusts to massive flows of money between countries.

Despite the unwelcome noises from Mr King, the Prime Minister was in his element, soaring through the wonkosphere. His second engagement of the day – a discussion on "a new multilateralism for the 21st century" at New York University – was his own idea, marking him as a rare politician without "an allergy to complexity", according to his gushing host, John Sexton, the university's Chancellor.

Relations between the Bank, the Treasury and No 10 have been shifting and strained for some months. The Bank pointed yesterday to the Governor's previous intervention in Treasury matters, when he pre-empted last November's pre-Budget report by declaring: "In these extraordinary circumstances it would be perfectly reasonable to see some use of fiscal stimulus, provided two conditions are met. One is that it would be... purely temporary, and second that it would be clear that there was a medium term plan to bring tax and spending back into a sustainable balance."

Last month, Mr King in effect denied that a decade of Mr Brown's stewardship of the public finances had left the UK with plenty of "headroom" to borrow: "We entered this crisis with levels of borrowing which were too high and that made it difficult. We haven't actually engaged in as big a fiscal relaxation as many other countries in recognition of that fact."

On these issues, the Bank usually lines up with Mr Darling. But previous tensions – over Northern Rock, the Bank's slowness to cut interest rates as recession loomed – soured relations. A turf battle about who was to be in charge of "quantitative easing" (in effect, printing money) seems to have slowed implementation of the policy, and No 10 and No 11 seemed to take an unconscionable time before confirming Mr King's second term last year.

After Mr King's latest remarks, it is a decision that Mr Brown may be coming to regret.

The stimulus enthusiasts

Brown The PM's global tour is about securing agreement for this; but how does it look if his own central bank governor and Chancellor oppose his plans? And what chance then of the G20 agreeing to such a boost?

Barack Obama and his Treasury Secretary Timothy Geithner Outspoken in demanding that the world follows their example. The EU-US tensions over foreign policy seen under George Bush are being overlain by fresh splits on economics.

Japan World's second largest economy lines up with the US and UK – despite Japan's national debt running to almost 150 per cent of GDP (compared to 49 per cent in the UK and 65 per cent in the US). Additional spending of a possible 20 trillion yen (£140bn).

India Another big borrower that plans to borrow still more. Officials say they will cut interest rates and increase the budget deficit.

IMF and World Bank The IMF has suggested a target of 2 per cent of GDP for fiscal stimulus. Both warn of the dangers of raising taxes and cutting public spending next year to pay for the "spending spree".

The cautious sceptics

Germany The Germans Less rude in their opposition than before – they used to call Brown's polices "crass Keynesianism" – but still blunt. German Chancellor Angela Merkel said during her recent trip to Britain: "We do not think much of the idea of a new package of measures."

France The Finance Minister Christine Lagarde said nations needed to "evaluate the remedies already put in place by each of us". Oppostion to Brown seems to have helped rebuild the Paris-Berlin axis.

Russia Also fiscally challenged, said to oppose the UK's original proposals for G20 members to set a mandatory minimum fiscal stimulus level at 2 per cent of GDP and cut interest rates, as suggested by the IMF.

The Bank of England The Governor's remarks on Tuesday were hardly veiled. "Leave it to Mervyn" is the motto, as he is keen to boost the economy – via "quantitative easing" (printing money).

HM Treasury Alistair Darling is well aware of the problems in funding the deficit – and the dangers if the Bank of England is the only willing buyer of their debt.

European Union The current EU President, the Czech leader Mirek Topolanek, called the US stimulus measures "the way to hell". So, not a fan then.

The European Central Bank Members pour cold water on UK ambitions, notably the Bundesbank president, Axel Weber.

China Ready to increase public spending and cut taxes, but her biggest service to the world economy is to keep buying US Treasury securities. But the Chinese premier last week warned Beijing is getting "a little worried" about vast US borrowing.

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