DAVID Cameron yesterday insisted the government would not delay spending cuts if the recovery starts to slow, but gave his strongest hint yet that he would support another round of quantitative easing.
Describing himself as a “fiscal conservative but a monetary activist”, the Prime Minister used his first official press conference to play down suggestions the government would slow the pace of fiscal consolidation in the face of faltering growth.
Cameron insisted the British economy was “making good progress” but cited several potential risks, including choppy recoveries in the US and Europe, as well as subdued lending to individuals and small businesses.
However, he insisted that looser monetary policy – not slower spending cuts – would be a better tool for boosting demand. With interest rates already at near-zero, that would almost certainly involve another round of quantitative easing.
He said: “I’ve always believed… that it’s monetary policy that is a better lever in terms of trying to make sure the economy is progressing and demand is growing”.
The Prime Minister was responding to comments from energy secretary Chris Huhne, who used a newspaper article at the weekend to suggest the government was not “lashed to the mast” over spending cuts. “It’s a bit like setting sail,” he wrote. “If the wind changes, you have to tack about to get to [your destination].”
Huhne’s comments fuelled fears the Treasury was planning to “reprofile” the spending cuts, effectively delaying big reductions in public expenditure until later in the parliament.
Treasury officials admit there might be some marginal revisions to that amount that spending is cut by in each financial year, due to contractual obligations and the cost of making government workers redundant. But there is not expected to be any major change to the pace of fiscal consolidation; in the words of one official, there is “no Plan B”.
Instead, the government hopes that the Bank of England’s monetary policy committee (MPC) will vote in favour of a second round of quantitative easing (QE) if the economy begins to flag.
According to a recent Bank report, the last batch of QE reduced market interest rates by between 75 and 100 basis points, suggesting it stimulated demand quite significantly.
Cameron’s comments come as new data suggests the economic recovery will be sluggish. The British Retail Consortium will today say that like-for-like retail sales grew by just 0.5 per cent year-on-year in September, while the Royal Institution of Chartered Surveyors is expecting house prices to fall further. The British Chambers of Commerce will say there must be “forceful action on the part of government and the MPC” to avoid a double dip recession.