A former member of the Bank of England’s Monetary Policy Committee (MPC) says that the Chancellor, George Osborne’s austerity policy is becoming “self-defeating” as the debate over how to get growth deepens.
Kate Barker, a senior economist, who some analysts believe could be a future Governor of the Bank of England, says in her report Macroeconomic Policy: too much autonomy and too little co-ordination, that the government’s insistence that it will not budge from its deficit reduction target leaves no “room for manoeuvre” or flexibility and adaptability around economic policy.
Ms Barker said: “The insistence by the Chancellor that there should be no deviation from the fiscal plan may be making it more difficult to announce adequate responses to unexpected economic events.
“There is a danger of self-defeating austerity, if some room for manoeuvre cannot be developed.
“There is a risk that the fiscal mandate, rather than a useful discipline, will become a straitjacket.”
In a report written for the think-tank CentreForum, Ms Barker says that the Chancellor should take more hands-on responsibility for the economy and not leave it to central bankers.
Ms Barker also called for changes to the Bank’s inflation target and questioned the effectiveness of quantitative easing (QE).
She recommends that the bank change its inflation forecast to between one and three per cent to help the central bank take a “longer term view of risks and a more strategic approach to monetary policy”.
She believes that QE, though useful at the start of the crisis, could become ineffective because adding more to the £375 billion worth of gilts could produce lower returns.
“There is concern that more QE will not prove sufficient,” she said.
She also says that the government’s current approach to monetary policy pays too little attention to what went wrong in the run up to the financial crisis.
Ms Barker believes the change in the pipeline to the central bank will hand too much power to the Governor of the Bank of England.
She said: “The next governor will be appointed to an unduly powerful role.”
She said that plans to put the bank in charge of preventing future financial crisis through the newly-created Financial Policy Committee (FPC) were a mistake and would overburden the central bank.
Ms Barker said: The institutional arrangements for the FPC are flawed, and retain much of what proved to be a weakness of the regime introduced in 1997.”
There has been a growing number of economists calling for a change to the government’s economic policy as the search for growth shows no signs of success as the UK is cemented in a double-dip recession.
This week, government borrowing increased by £600m in July, a month that usually gives a surplus and reduces the UK’s overall public sector debt.
Last week, nine of the 20 eminent economists who signed a letter to the New Statesmen backing George’s Osborne’s deficit reduction programme in 2010, said that they had changed their mind and urged the government to slow the pace of cuts and come up with a plan for economic growth.
Meanwhile, Adam Posen, a departing member of the MPC said the government should use the UK’s record low borrowing costs to increase targeted spending.
He said: “As long as interest rates are as low as they are in the UK, it doesn’t make any sense to sit on the money.”
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