Bank of England Monetary Policy Committee Member Gets It

By Michael Burke

Adam Posen, one of the external members of the Bank of England’s Monetary Policy Committee (MPC) has warned that the government’s spending cuts will cause ‘significant headwinds’ for the economy. In an interview with The Times (October 28), Posen says, ‘My forecast is that the Government’s plans for 2011 and 2012 will have a material down-drag on growth.’

Posen also highlighted key areas which would have a ‘particularly high short-term impact’- public sector job cuts, cuts to welfare spending and the VAT hike, with all of these reducing the incomes of middle-income earners and the poor- who will be forced to cut back spending. In a similar vein, the chief economist for the Chartered Institute for Personnel Development argues that not only would raising VAT hurt the same groups, but would also create an additional 200,000 job losses in retailing and related sectors, bringing the likely total job losses up to 1.6 million, not the 490,000 claimed by the Tory-led Coalition.

Posen is a US academic who has closely studied the ‘lost generation’ of slow growth and recession in Japan which has been in place since 1990, warns of increased risks have of too slow growth with a negative impact on prices. He also argues that Coalition policy choices have increased those risks, whereas an increase in Capital Gains Tax would not. (In fact from the June Budget higher rate tax payers will pay just 28% on this unearned income, compared to 50% on their salaries).

But in an echo of what SEB , Green and anti-poverty campaigners have called for, Posen’s boldest proposal is that the State-owned banks should not be privatised, but instead used to increase productive lending. ‘You can take the large banks in which the UK Government has a controlling stake and change their lending behaviour,’ he says.

‘....In my opinion the Government should be saying it is more important to the UK taxpayer right now that we have banks under our control providing more lending than that we maximise the privatisation proceeds in the near-term.

‘The historical record is it is penny-wise and pound-foolish to try to maximise the returns from the rapid resale of your nationalised banks. It is better to use them to help get out of the credit crisis and the recession....’.

A sensible word from inside the Bank of England at last.