Mervyn King said the unsayable about Britain’s economy

This morning the BBC hosted a current Tory leadership contender and the leader of the opposition on Sunday with Laura Kuenssberg. Yet the most insightful comments came from one of the panel members: Lord Mervyn King, former governor of the Bank of England between 2003 and 2013. Asked by Kuenssberg about the narrative that’s doing the rounds with some Truss supporters – that markets ‘bullied’ Truss out of her plans and out of office – King offered up a robust response and a clear explanation of what had gone so badly wrong:

“Markets are not in charge. Governments and central banks are. Markets respond to the announcements made by government and central banks. And central banks have lost control of inflation, government lost control of the public finance; not surprising that markets respond to that.

“I think all central banks in the west, interestingly, made the same mistake. And during Covid, when the economy was actually contracting because of lockdown, central banks decided it was a good time to print a lot of money. That was a mistake. That led to inflation. We had too much money chasing too few goods. And the result was inflation. That was predictable. It was predicted, and it happened. So that’s one problem we have to try to get out of. But the public finances both in the United States and the United Kingdom were not put on a sustainable track. And markets responded to that.

King’s comments succinctly tapped into several important factors that led to the mini-Budget blow-up and the economic crisis we’re in. He noted the extent to which this is an international story: that the UK is not the only country experiencing higher interest rates or borrowing costs, as the economic climate is changing for everyone (albeit it’s happened faster in Britain, with far more international attention).

His comments on central banks were rather pointed, too. Throughout the interview King kept making it clear that mistakes had been made by all central banks, though it was obvious he was including Bank of England’s decision to move so slowly on inflation, lambasting the decision to print as much money as it did. While the cost of schemes like furlough – roughly £70bn in total – did require the Bank and Treasury to work hand-in-hand, it has been a point for contention for a while now just how much money printing took place (the Bank printed more money in the first year of Covid than it did in the decade leading up to it).

Not only did the Bank oversee this huge increase in the money supply; government policy saw cash flow into the real economy (into people’s bank accounts through furlough, support schemes, etc), yet central banks played into the popular denial that none of this would have inflationary consequences. At one point in the show this morning King placed blame on the economics profession more widely: 'If I were to blame anyone,’ he said, ‘I would blame the economics profession for encouraging [central banks] to print money [like] it didn’t matter.’

Crucially King also underlined that markets are not political in the way party politics are. They are not responding to particular tax cuts or spending pledge that they don’t agree with – they are responding to the sustainability of financial plans, the ‘sustainable track,’ as King called it. The mini-Budget was more evidence that fiscal discipline was no longer being taken so seriously after the pandemic, at a time when public debt has skyrocketed and deficits in peacetime hit record highs. It appeared to be a tipping point, which all politicians are having to grapple with now.

But perhaps the biggest impact of King’s appearance this morning was not simply what he said, but how his contributions framed the series of political interviews Kuenssberg was hosting. King was warning this morning about the ‘more difficult’ decision to come, including austerity and possibly ‘significantly higher taxes’ to fund public services, both to get the books in order but also to avoid passing on a staggering bill to future generations.

His comments echoed as Penny Mordaunt, once again a Tory leadership hopeful, refused to comment on any public policy, economic and otherwise, insisting that she would ‘not being drawn into the detail’ on decisions that presumably she would need to start making in less than a week, were she to become leader and prime minister. This included not talking about how she might reduce the UK’s deficit, which is thought to be required to regain market confidence and get things back on track – no doubt in part due to the serious lack of popularity spending cuts will have at a time when the cost of living crunch is worsening.

‘You heard from Penny Mordaunt,’ King pointed out, ‘we will probably hear in a minute from Keir Starmer, that public expenditure isn’t going down, if anything it will go up. Therefore taxes will have to rise to fill the gap which is there at present. That doesn’t make a very happy picture for the next few years.’

Indeed, that’s exactly what happened when the Labour leader sat down in the hot seat, refusing to be pulled in on discussion of spending cuts, while insisting that some areas needed a funding boost. Starmer singled out healthcare, declaring ‘of course the NHS needs more money’ (he followed up later with vague talk of reform as well). With healthcare spending on track to account for almost 45 per cent of day-to-day government spending in the next few years, at some point Starmer will have to lay out just how high he thinks that number should go, and where exactly the money might come from.

But for now, it simply underlined King’s point that these are difficult times indeed. Very few politicians are ready to discuss the remedies publicly, nor are they prepared to seriously discuss spending cuts. Several examples of this played out in front of him, and us, on the BBC this morning.