Bank governor urges fiscal caution

The Government's policy of throwing money at the stricken UK economy may have to be reigned in, according to Bank of England governor Mervyn King.

He said that the parlous state of the public finances means that there is very little money left to throw, and that Chancellor Alistair Darling may have to reconsider his options.

He said: "Given how big those deficits are, I think it would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits."

He was referring to the multi-billion-pound state bailouts of banks and the buying up of their toxic assets in a bid to kick start the economy by boosting the supply of credit.

He was giving evidence to the Commons Treasury Committee just as Prime Minister Gordon Brown is urging the biggest global fiscal stimulus of all time in the run-up to the G20 summit.

Mr Brown`s spokesman said: "We will do whatever it takes to see us through the global downturn, and a crucial part of that is to ensure that we co-ordinate action globally.

"The governor of the Bank of England has a remit to look overall at the UK economy, specifically related to meeting the inflation target of 2%."

His caution over a second round of fiscal stimulus measures followed a call from former Cabinet minister Stephen Byers for the Chancellor to abandon the centrepiece of his November package - the temporary cut in VAT to 15%.

Mr Byers, who originally supported the move, said in an article on the Progress website: "I do now question whether it has run its course, both in terms of its overall benefit to the economy and in relation to the political return that comes to the Government."

Shadow chancellor George Osborne said the comments of the two men were "a defining moment in the political argument on the recession", which vindicated the Conservatives' stance and left Mr Brown isolated.

"The big debate in British politics about the recession has been whether or not the country could afford a debt-funded fiscal stimulus. When the Conservatives opposed the VAT cut last autumn, Gordon Brown said we were alone," he said.

"Today, not only has a former Labour Cabinet minister attacked the ineffective VAT cut, but the governor of the Bank of England, no less, has said Britain cannot afford a further fiscal stimulus. This is hugely significant."