Leader: Don’t bet the bank on Mark Carney

Until the government marries monetary activism with fiscal activism, Britain will not have a recovery worthy of the name.

We live in the age of the cult of the central banker. As governments of both left and right have retreated from economic interventionism, it is Ben Bernanke in the United States, Mario Draghi in Europe and Haruhiko Kuroda in Japan who have led the fightback against recession. Few of the new masters of the universe are more feted than the Canadian Mark Carney, who takes office as governor of the Bank of England on 1 July. Since being named as Mervyn King’s successor six months ago, he has been continually hailed as a saviour for the British economy. When it was pointed out to George Osborne that the Office for Budget Responsibility had forecast that the measures included in his most recent Budget would have “no impact on the level of GDP”, he replied that the estimate did not take into account the changes that Mr Carney would make. The Chancellor is a self-described “fiscal conservative” and “monetary activist”. He is banking on Threadneedle Street to deliver the recovery that he has not.

The appointment of Mr Carney (who is profiled by Alex Brummer on page 20) was a shrewd one. As our economics editor, David Blanchflower, a former member of the Bank’s Monetary Policy Committee (MPC), has written, he was “the best person available” for the job. Untainted by any of the recent banking scandals, he performed admirably as governor of the Bank of Canada, cutting interest rates aggressively in March 2008, a year before the Bank of England and the European Central Bank did. Mr Osborne was right to prefer him to the City’s candidate of choice, the deputy governor Paul Tucker, who ignored early warnings of the manipulation of LIBOR by Barclays and responded sluggishly to the financial crisis.

But if Mr Carney, in the words of one of his defeated rivals, has been “launched on the nation as a messiah”, there are good reasons to believe he will be a false one. The base rate is already at a record low of 0.5 per cent, where it has been for more than four years, and the Bank has already performed £375bn of quantitative easing (QE), the equivalent of nearly a quarter of annual GDP. With growth still anaemic and inflation at just 2.4 per cent, there is a strong case for further loosening but Mr Carney will need to overcome the resistance of the MPC, which has voted against additional QE for 11 consecutive months. Unlike in Canada, where the governor has sole responsibility for policy, he will require the support of a majority of the other eight committee members, six of whom have consistently opposed new stimulus.

Where Mr Carney is more likely to prevail is in following the example of the US Federal Reserve and offering “forward guidance” on interest rates. This would entail a commitment to keep rates low until a certain economic threshold has been met (the Federal Reserve has adopted an unemployment target of 6.5 per cent). Although the markets already expect the base rate to remain at 0.5 per cent until 2016, this would have the beneficial effect of dampening expectations of a rise should growth exceed current forecasts. The principal reason to remain sceptical of Mr Carney’s potential is the inherent limits of monetary policy. When consumers are unwilling to borrow and banks unwilling to lend, it is the state that must act as a spender of last resort and stimulate growth through measures such as temporary tax cuts, housebuilding programmes and infrastructure spending. It is Mr Osborne’s reluctance to accept this truth that does much to explain the parlous performance of the British economy, which has grown just 1.1 per cent since 2010 and remains 2.6 percentage points below its pre-recession peak. The Chancellor is fond of citing the example of Mr Carney’s native Canada, which eliminated its deficit in just three years in the mid-1990s, but it was the concurrent boom in the US, not an “expansionary contraction”, that enabled it to do so.

As even the new governor has said, “Some people may be expecting central banks to do too much” – and none more so than Mr Osborne. Until the government marries monetary activism with fiscal activism, Britain will not have a recovery worthy of the name.

Incoming governor of the Bank of England Mark Carney arrives at the G7 finance ministers and central bank governors meeting in Aylesbury on 10 May, 2013. Photograph: Getty Images.
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Who will win in Stoke-on-Trent?

Labour are the favourites, but they could fall victim to a shock in the Midlands constituency.  

The resignation of Tristram Hunt as MP for Stoke-on-Central has triggered a by-election in the safe Labour seat of Stoke on Trent Central. That had Westminster speculating about the possibility of a victory for Ukip, which only intensified once Paul Nuttall, the party’s leader, was installed as the candidate.

If Nuttall’s message that the Labour Party has lost touch with its small-town and post-industrial heartlands is going to pay dividends at the ballot box, there can hardly be a better set of circumstances than this: the sitting MP has quit to take up a well-paid job in London, and although  the overwhelming majority of Labour MPs voted to block Brexit, the well-advertised divisions in that party over the vote should help Ukip.

But Labour started with a solid lead – it is always more useful to talk about percentages, not raw vote totals – of 16 points in 2015, with the two parties of the right effectively tied in second and third place. Just 33 votes separated Ukip in second from the third-placed Conservatives.

There was a possible – but narrow – path to victory for Ukip that involved swallowing up the Conservative vote, while Labour shed votes in three directions: to the Liberal Democrats, to Ukip, and to abstention.

But as I wrote at the start of the contest, Ukip were, in my view, overwritten in their chances of winning the seat. We talk a lot about Labour’s problem appealing to “aspirational” voters in Westminster, but less covered, and equally important, is Ukip’s aspiration problem.

For some people, a vote for Ukip is effectively a declaration that you live in a dump. You can have an interesting debate about whether it was particularly sympathetic of Ken Clarke to brand that party’s voters as “elderly male people who have had disappointing lives”, but that view is not just confined to pro-European Conservatives. A great number of people, in Stoke and elsewhere, who are sympathetic to Ukip’s positions on immigration, international development and the European Union also think that voting Ukip is for losers.

That always made making inroads into the Conservative vote harder than it looks. At the risk of looking very, very foolish in six days time, I found it difficult to imagine why Tory voters in Hanley would take the risk of voting Ukip. As I wrote when Nuttall announced his candidacy, the Conservatives were, in my view, a bigger threat to Labour than Ukip.

Under Theresa May, almost every move the party has made has been designed around making inroads into the Ukip vote and that part of the Labour vote that is sympathetic to Ukip. If the polls are to be believed, she’s succeeding nationally, though even on current polling, the Conservatives wouldn’t have enough to take Stoke on Trent Central.

Now Theresa May has made a visit to the constituency. Well, seeing as the government has a comfortable majority in the House of Commons, it’s not as if the Prime Minister needs to find time to visit the seat, particularly when there is another, easier battle down the road in the shape of the West Midlands mayoral election.

But one thing is certain: the Conservatives wouldn’t be sending May down if they thought that they were going to do worse than they did in 2015.

Parties can be wrong of course. The Conservatives knew that they had found a vulnerable spot in the last election as far as a Labour deal with the SNP was concerned. They thought that vulnerable spot was worth 15 to 20 seats. They gained 27 from the Liberal Democrats and a further eight from Labour.  Labour knew they would underperform public expectations and thought they’d end up with around 260 to 280 seats. They ended up with 232.

Nevertheless, Theresa May wouldn’t be coming down to Stoke if CCHQ thought that four days later, her party was going to finish fourth. And if the Conservatives don’t collapse, anyone betting on Ukip is liable to lose their shirt. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.