Osborne needs a change of direction, says top former Bank of England officialby Adam Posen / December 20, 2012 / Leave a comment
Published in January 2013 issue of Prospect Magazine
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While serving on the Monetary Policy Committee, the committee at the Bank of England that sets interest rates, I avoided addressing directly the current government’s Plan A for economic recovery through austerity. I felt and feel that sitting central bankers should not publicly comment on fiscal policy beyond forecasting its short-term effects, or on structural matters. Silence, however, was not assent on my part. For two-and-a-half years, the coalition government’s economic policies have focused on the wrong narrow goal, been self-defeating in pursuit of that goal, and in so doing have eaten away at British economic capabilities and confidence. It is past time for me, and far more importantly for the chancellor, to say so. Unfortunately, his Autumn Statement reiterated the same misguided priorities of deficit reduction and the same failed approach, with only minor variations.
The coalition government has failed to address the shortfall in productive British investment. As many have pointed out, British capital investment, public and private, has been well below the level of that of its international competitors like Germany, France, Japan, and the US. Addressing the shortfall requires structural, supply side measures, as well as a demand or stimulus agenda that fits with those measures, and is by definition business supporting. It requires confronting the real deficiencies of the British financial system with the same reformist zeal with which governments took on labour market liberalisation in the 1980s and 1990s. For at least 100 years, the City has far better served global finance than British domestic business, and that means the UK government needs to develop alternatives to the City for internal investment.