We need an open contest to decide who will run the Bank

Allister Heath
THERE is no doubt that George Osborne’s most important decision over the next few months will be who he appoints as the next governor of the Bank of England. That job, which becomes vacant next year, is by a huge distance the most powerful unelected position in the UK; its formal powers now span monetary policy, financial regulation, macroprudential policies, lender of last resort and even fiscal policy of sorts via QE. There need to be as many good candidates as possible. It is a shame, therefore, that Peter Sands of Standard Chartered has ruled himself out of the race, as we reveal today.

Osborne should either appoint the charismatic Paul Tucker – the Bank’s deputy governor, who would represent continuity but be far more of a traditional candidate, at ease with the City – or he should bring in a banker with extensive private sector experience. Now that Sands has ruled himself out, the leading banking candidate is Lord Green, formerly of HSBC. Osborne should definitely steer clear of appointing somebody who hates banking. Previous governors showed that one could have authority over the City without being ideologically opposed to it. Osborne should also avoid appointing another academic economist.

It remains tricky to assess the candidates at this stage. Rather than merely privately lobbying the chancellor, we need the first ever open contest for the governor’s job: the candidates should now make their intentions clear and release manifestos for all to read. It is too important a job to be decided behind closed doors by a few men in grey suits.

Speaking of which, in theory the Bank of England will eventually sell back to the markets the £350bn or so in gilts it will own as a result of quantitative easing (QE). Yet I doubt this quantitative tightening (QT) will ever happen. The UK will still be borrowing too much for years to come.

A more honest and preferable option would be for the authorities to admit that the £350bn has been permanently monetised and for the Treasury to cancel all of the gilts owned by the Bank – in other words, admit that the Bank has permanently created more money, and used that to pay off government debt. Do taxpayers really need to be paying interest to the Bank on the gilts that it holds? A cancellation would cut the UK’s debt to GDP ratio from 63 per cent to 41 per cent, and slash the interest bill on gilts from £50bn to £32bn per year. The Bank holds these gilts on behalf of the Treasury, so the Treasury is paying interest to itself (and regardless of definitional niceties, the fact is that the state is borrowing from itself).

As M&G’s Jim Leaviss points out, the gilt cancellation could take place using the same process and precedent set with the cancellation of £9bn of UK of gilts acquired from the Post Office pension scheme in April 2012. No default would take place (so there would be no CDS trigger and no D from ratings agencies only interested in failures to pay private investors). Of course, the credibility of UK monetary and fiscal policy would be badly shaken – but that is at it should be. We have a major problem – pretending otherwise doesn’t help anybody.

My issue with Ken Livingstone’s tax planning is that he is being hypocritical. You can’t rage against legal tax avoidance, as Ken has – and then practice it yourself. Socialist tax lovers such as himself should actually relish handing their hard-earned cash over to HMRC, not do their best to cut their bills. I doubt the electorate will forgive him for his double standards.