Last updated: November 10, 2010 8:54 pm

King denies crossing line over coalition

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Mervyn King, governor of the Bank of England, has rejected suggestions from some senior Bank officials that he has gone too far in his support for the coalition’s plans for aggressive fiscal consolidation.

Dismissing worries that he had tied himself too closely to the government’s plans for rapid and deep cuts as not a “serious question”, Mr King said members of the monetary policy committee all agreed on the need for a credible deficit reduction.

But a Financial Times report on Tuesday that current and former members of staff – including some members of the MPC – felt Mr King had crossed the line in endorsing the coalition’s plan to eliminate the deficit reinforced Labour’s own concerns.

George Mudie, a Labour member of the Commons treasury committee, said it had “become a habit” for the governor to side publicly with the Tory position on deficit reduction.

A spokesman for Alan Johnson, the shadow chancellor, said: “The government clearly does not have a monopoly of wisdom on how to deal with the deficit. The divergent views on the MPC demonstrate this clearly.”

Mr King, speaking at the publication of the Bank’s latest forecasts for growth and inflation, said there might be differing views on fiscal policy on the MPC, just as there were differing opinions on monetary policy.

“I’m sure there are probably different views on fiscal policy but we don’t sit down and discuss it because it’s not the remit of the MPC,” he said.

But he added: “You need a credible medium-term fiscal plan in place. I don’t think anyone on the committee disassociates themselves from that view.”

Discomfit among Bank officials with Mr King’s support for the coalition’s plans has developed following some unusual interventions by the governor.

A year ago Mr King told MPs that Labour lacked a “credible plan” to restore the public finances. Then, days after the election, he backed the Conservative and Lib Dem plans for a faster pace of cuts, saying that any harm they did to the economy would be “swamped by [good] news that we will get about movements in domestic demand”.

Airing the Bank’s inflation report in August, in which the growth forecast was downgraded, Mr King refused to pin any blame for slower growth on plans to slash spending – unlike most private sector economists who also reduced their forecasts.

In addition to Mr King and George Osborne, Sir Nick Macpherson, the Treasury permanent secretary, fully supports the need for a faster consolidation. The chancellor had planned to deploy Mr King and Sir Nick to persuade the Lib Dems to back a £6bn cut in public spending this year during coalition talks; in the end Nick Clegg’s party needed no persuading.

Mr King had a long history of discord with the previous Labour government. Gordon Brown’s public procrastination about whether to reappoint him soured relations with the governor, and they never recovered.

“Of course, Mervyn would always be careful to say something else which appeared supportive of government policy, but he must have known how his remarks would be interpreted,” a former Treasury official said.

“Alistair Darling didn’t think he had a blue rosette on his desk or anything like that . . . but Mervyn has been around long enough to know what he is doing.”

Relations became so dire that Mr Darling believed Mr King had become a conduit to the Tories, however unwittingly, of confidential government thinking, notably on a banking sector bail-out in October 2008.

Mr King has vehemently denied the suggestion, but the fact that suspicions lingered in the Treasury was a sign of poor relations.

One Labour former minister said: “The quickest way to convey our thinking to George Osborne was to tell the governor. Reappointing him was one of Gordon Brown’s biggest mistakes.”

Labour has watched Mr King’s endorsement of the coalition’s fiscal approach as further evidence that he risks compromising his political independence.

“It’s absolutely paramount the governor should be away from politics,” said a Labour former minister. “He derives his authority from his independence.”

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