When the former Chief Secretary to the Treasury, David Laws, revealed in his book on the coalition negotiations that the Governor of the Bank of England, Mervyn King, was invoked as a supporter of the Conservatives’ plans to cut public expenditure by $6bn in an emergency budget, there was something of a furore. According to Anthony Seldon’s book, Brown at 10 (2010, p. 458), Gordon Brown demanded to know whether Mr King had spoken to Nick Clegg during the negotiations. The Bank of England denied this, but the incident provides more than irony, given that this was probably the first time Mr King and Mr Brown had spoken since the former called for a plan for reducing the truly terrifying deficit (Seldon 2010, p. 361).
Given this history, you would expect Labour’s approach to the Bank of England to be suspicious, if not outright hostile. The Shadow Chancellor, Ed Balls’ interview this morning could be interpreted as such, given that he accused the Governor of being ‘loyal’ to the current government and not being true to his own ‘heart of hearts’.
On the other hand, Balls also sympathised with Mr King’s situation. The Bank of England, in a settlement engineered by Mr Balls when an advisor to Gordon Brown back in 1997, is responsible for setting interest rates, buying and selling bonds and setting inflation targets, without the intervention of Whitehall. During the credit crunch and subsequent recession, the Bank has opted to keep interest rates at close to zero and practicing quantitive easing – buying back bonds to ensure that cash circulates and keeps the economy active. Generally regarded as a success, the Bank has nonetheless had to explain to his political masters why inflation keeps exceeding the target of 2%.
Perhaps Mr Balls is embarking on a relatively subtle (for a man renowned as an ‘attack-dog’) excercise to win friends and influence Mr King. In accusing the government of failing to support the Bank of England’s efforts to boost the real economy by raising VAT and precipitating an unemployment crisis, Mr Balls is attempting to make Mr King a prop – willing or unwilling – in his efforts to paint the goverment as irresponsible in its handling of the economy. In addition, he is using a card associated with Mr Brown – highlighting the more interventionist approach of the American Treasury – or, at least, while that lasts.
Confidence in a political party is as much to do with lack of confidence in the alternative, and Mr Balls will be determined to turn the tables on the Conservatives as soon as possible. Mervyn King has already warned of the likely decline in living standards as wages stall and inflation rises – that much will be accepted by anyone still in a job and with a mortgage. Unemployment will be more of a political livewire, and with George Osborne reportedly complaining at Davos that he cannot get British companies to spend the 5% of GDP that they are hoarding in cash, Mr Balls will feel he is well placed to exploit this paradox of thrift.