For­mer Bank of­fi­cials call for tax cuts or spend­ing boost at next down­turn

The Guardian - - FINANCIAL - Phillip In­man

The gov­ern­ment will need to cut taxes or boost spend­ing when the next eco­nomic down­turn ar­rives, ac­cord­ing to two for­mer Bank of Eng­land of­fi­cials who said the cen­tral bank was low on fire­power.

The for­mer deputy gover­nors Rachel Lo­max and Sir Char­lie Bean warned min­is­ters they would be un­able to rely on mon­e­tary pol­icy to com­bat the next re­ces­sion be­cause in­ter­est rates were at his­tor­i­cal lows.

They said a stim­u­lus pack­age based on a cut in the bank’s base rate from 0.75% would only have a lim­ited ef­fect on bor­row­ing costs and leave the Trea­sury with no op­tion but to use its own fi­nances to boost the econ­omy.

The com­ments came a week af­ter the Bank of Eng­land gover­nor, Mark Car­ney, said a dis­or­derly exit from the Euro­pean Union could plunge the UK into a deeper re­ces­sion than any seen in the past 100 years.

Car­ney said the sce­nario mapped out by Thread­nee­dle Street to il­lus­trate the worst pos­si­ble out­come from a no-deal Brexit would push up un­em­ploy­ment and in­fla­tion while also hit­ting house prices.

Speak­ing at a mon­e­tary pol­icy fo­rum or­gan­ised by Fathom Con­sult­ing, Bean, who is chief fore­caster at the Of­fice for Bud­get Re­spon­si­bil­ity, said: “I do think we need to start think­ing again about us­ing fis­cal pol­icy more ac­tively than we have in re­cent years.” In a broader at­tack, Lo­max said gov­ern­ments would need to adopt ex­tra spend­ing to aid the re­cov­ery and not fol­low the aus­ter­ity pro­gramme of the past 10 years.

“It is a ma­jor puz­zle to me that the re­ac­tion to the fi­nan­cial cri­sis on fis­cal pol­icy was the way it was,” she said. “Gov­ern­ments have got scared of fis­cal pol­icy re­sponses and if ever there was a case for it, it was then,” she added.

Bean also said that if min­is­ters were re­luc­tant to bor­row more, they could boost the econ­omy in a down­turn with pub­lic in­vest­ment backed by tax in­creases, which would stim­u­late growth more than other mea­sures.

Over the longer term, Bean and Lo­max said gov­ern­ments should con­sider tax­ing wealth, and prop­erty in par­tic­u­lar, to re­duce the need for higher gov­ern­ment bor­row­ing. Bean said: “A wealth tax could tar­get prop­erty, though there is now a se­ri­ous de­bate about tax­ing land.”

Lo­max said her work in the Trea­sury dur­ing the 1970s in­volved draw­ing up a wealth tax green pa­per for the then Labour gov­ern­ment, which was shelved. A critic of Ge­orge Os­borne’s aus­ter­ity poli­cies, she said the gov­ern­ment and the cen­tral bank needed to have a more joined-up ap­proach to tack­ling the next fi­nan­cial cri­sis or risk a long pe­riod of stag­na­tion.

“Mon­e­tary pol­icy has be­come siloed since cen­tral bank in­de­pen­dence in the 1990s. There needs to be an ex­am­i­na­tion of the win­ners and losers from var­i­ous poli­cies: a po­lit­i­cal econ­omy ap­proach rather than one where fis­cal and mon­e­tary pol­icy are sep­a­rate,” she said.

PHO­TO­GRAPH: YUI MOK/PA

▲ The Bank of Eng­land was said to have few op­tions left

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