Brown must follow Bernanke’s advice
MUCH of what Ben Bernanke, the Federal Reserve chairman, had to say last night could easily be transposed to the UK. He made several main points in his testimony to Congress, most of which are relevant to Britain. The rate of decline in the US economy has slowed significantly, demand and production are beginning to stabilise, financial conditions aren’t as bad – but credit remains tight. Exactly the same is true of the UK economy, though it seems we are a good quarter ahead of the US when it comes to moving out of technical recession.
Of most interest was Bernanke’s claim that the Fed has prepared an exit strategy from its massive monetary easing but that it remains way too early to start tightening. He has plenty of tricks up his sleeve and maintained that several channels would operate when the time was right, including the natural winding down of some lending facilities and a reduction in the quantity of long-dated bonds held by the Fed. But his message to the politicians was especially blunt: the Fed has an exit strategy; please don’t meddle with it; try and focus instead on sorting out your own affairs, namely the crippling budget deficit. Let us hope Mervyn King feels able to be this blunt next time he talks to politicians.
On the day the UK government announced plunging receipts and surging spending sent the budget deficit to a record £13bn in June, taking the total in the first three months to a staggering £41.2bn, Bernanke’s combative attitude was the only ray of hope. We have spent days engrossed in the battle between the Tories and Labour on banking regulation, but shifting a few thousand regulators from Canary Wharf to Threadneedle Street – assuming they even move physically – will be a piece of cake compared to the real challenge, which is to bring down the budget deficit.
Ending quantitative easing will be tough and will have to be handled with extreme care; but as long as liquidity has started growing of its own accord again, it should be manageable. The problem is not in Threadneedle Street – it is in Downing Street. The next crisis will come from the necessary deflating of the public spending bubble, rather than from the creation of another credit bubble.
It is therefore imperative that the Tories now match their undoubted progress on financial reform by publishing a detailed, step-by-step and credible guide as to how they will bring the public finances back under control. How this is done will be the single most important factor determining the UK’s economic performance over the next three years.
MOBILITY WOES
Labour MP Alan Milburn’s report on class mobility confirms that privately-schooled youngsters retain the lead in the hunt for professional jobs; those from poorer backgrounds are finding it tough. Accountancy and journalism have suffered the greatest drop in social mobility. Many of Milburn’s solutions would achieve little; one is worth highlighting. Parents in areas where schools under-perform would be given a credit worth 150 per cent of the cost of the child’s schooling to take them to a state school of their choice. I would make the credit just 100 per cent but make it redeemable in any willing school, not just in the state system. That would be bound to make a real difference. [email protected]