Until last month, George Osborne had more or less given up hope of persuading Mark Carney to come over to the UK to succeed Sir Mervyn King as Bank of England Governor.
As a result, the mood in Downing Street was one of depressed resignation: all of the other candidates, while worthy, had niggling flaws.
Paul Tucker, the deputy governor and runaway favourite, was tainted by his handling of the Libor crisis – and having been a Bank insider since the beginning of his career, wasn’t the obvious choice to shake the institution up. Lord Turner had been at the FSA during much of the crisis, and Treasury insiders suspected he would spend most of his time as Governor lecturing them.
Carney had the virtue not merely of being an outsider, but of having the entire suite of abilities to do the job: a fine economics pedigree from Harvard and Oxford; a stint in the City showing he understood how finance really works; a period as chairman of the Financial Stability Board, overseeing international finance.
And, most of all, as Bank of Canada Governor he had helped Canada avoid the worst of the crisis. Indeed, his handling of the country’s economy and financial system was broadly regarded as a case study of how to do things right.
The problem was that he didn’t seem to want the job.
Osborne had been chasing Carney since early this year, when he first floated the idea with the Canadian at a G20 summit in Mexico. He then asked him officially in August.
Carney said no. He still had 18 months left in the job. He didn’t want to do the eight year term Osborne was stipulating. And that was before one even considered the notion of becoming the first non-UK Governor in the Bank of England’s 318-year history.
So until last month he was dismissed from the running. Then Osborne made another approach. This time around, he sold the prospect more aggressively. Plus he said that if Carney insisted, he would reduce the term to five years – after all the main principle was to have a single term rather opening up the messy question of reappointment – as had happened after Sir Mervyn’s first term.
This time around, Carney didn’t say no. Outlandish as the prospect of the appointment was, he was interested. The weekend before last he made a surreptitious visit to London, and on the Sunday he was interviewed by the Treasury/Bank of England panel – and by Osborne himself. Shortly afterwards, he signed on the dotted line, and this most unconventional of all central bank appointments became a reality.
So Osborne has got his man – someone he regards as a genuine one-of-a-kind – and, as an added bonus, he also managed to keep it secret from the journalists and traders desperate to know the new Governor’s identity.
But Carney’s honeymoon is unlikely to last long. Once he takes office next summer he will be faced with one of the biggest challenges in economic policymaking. It isn’t merely that the UK is still in dire economic straits – still barely recovering from the financial crisis, still stuck on the brink of recession.
The Governor role has become a mammoth, almost unmanageable challenge. Carney will have more powers and responsibilities than any Governor in recent history – and the expectations to match. He will have to overhaul an institution which has been built in his predecessor’s image. And he will have to try to create a new system of banking regulation that turns Britain from a financial basket case back into a word leader.
It’s quite a check-list – but Osborne is convinced that if there’s one man capable of this, it’s Mark Carney. Time will tell. As England football fans know to their cost, hiring in a highly-rated manager from overseas might seem like a cure all. But in economics, as in football, having the best manager isn’t everything.read more
The Institute for Fiscal Studies has warned that the Government will have to borrow more than expected this year, and that George Osborne will miss at least one – and possibly both – of his two fiscal rules. How exactly has this happened? Here is the story in three pictures from the IFS report on the autumn statement.
The main reason the public finances will disappoint this year is that the economy is likely to be substantially weaker than expected.
You can see what’s happened in this table: back in March the Office for Budget Responsibility was predicting cumulative GDP growth of 5.5% from 2012 to 2014. The average of independent forecasters today is less than half that, at just 2.6%.
Lower growth means less tax revenue, and potentially more in unemployment benefit payments, which in turn will swell the budget deficit.
What’s less clear is whether that growth that’s been foregone is lost permanently or is merely a temporary aberration, and that the economy will bounce back. So the IFS has provided two scenarios in its forecasts: an optimistic one which assumes that economic disappointment is merely a cyclical (eg temporary) thing, and a pessimistic one which assumes that that GDP is gone forever. Here’s a table of what those scenarios entail.
The big question is whether the Chancellor will break his fiscal rules as a result of all this extra borrowing. The first of the rules is that the cyclically-adjusted budget must be in balance (eg not in negative territory) over the following five years. According to the IFS, the Government can meet this rule under its optimistic scenario, but will break it (eg the cyclically-adjusted budget will be in negative territory in 2017/18 as per the dark grey line).
The second rule says that Britain’s net debt – the total pile of debt built up by Britain over the years – must be falling by the end of the Parliament – between 2014/15 and 2015/16. Unlike the first rule, which is a moving five-year target, there is no putting this one off, and the IFS says that under both of its scenarios, the Government will miss it.
However, it’s worth pointing out that the IFS projections purposefully ignore the £37bn windfall the Government will reap as a consequence of the Bank of England shifting the profits from its quantitative easing programme over to the Treasury. However, some economists believe that the Chancellor could just about meet his second rule thanks in part to this extra money, which will reduce the size of the national debt.
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