Just before the 2010 election I asked a senior Tory economic adviser if the prospective new Chancellor would reconsider the Bank of England’s remit. He looked at me as if I was mad.
“That’s not something we’d want to do,” he said. “Just think what that would do to markets.”
It’s a sign of the times that Mr Osborne now considers an overhaul of the Bank’s remit one of the most promising levers he has left to get economic growth going. What’s changed since then? Put simply, Britain is in a deep economic rut, still stuck, in a way no politician really conceived was possible back at the election. And the Conservatives are willing to consider policy changes they dismissed as barmy only a few years ago.
To give you an idea of the scale of this problem, consider Britain’s gross domestic product – the totality of what people and companies in the UK earn each year. It isn’t just below where it was at the start of the crisis in 2008 (as of the most recent figures, for the final quarter of last year). It is still languishing at the same kind of level it was at the end of 2006. Britain, just to make it absolutely clear, is currently generating the same amount of income as it was seven years ago. This length of depression has never happened in modern statistically-documented history.
If you look specifically at average household earnings, the picture is even worse: real earnings, according to the Office for National Statistics, are now at similar levels to those of 2002-03.
That weak growth explains the fact that, despite relatively strenuous efforts from the Treasury to get borrowing down, the deficit is actually creeping higher. A weaker economy generates less tax income for the Chancellor. It’s a blessed relief in Whitehall that unemployment hasn’t been higher as that would have pushed welfare spending up even more.
But how does one get growth going if you’ve committed to reducing your spending? The answer, in David Cameron’s words today (indeed, his words since 2010) is to complement your fiscal conservatism with monetary activism, which means giving the Bank of England room to stimulate the economy more in your stead.
Now, there are valid question marks over the extent to which central bank actions can cause a sustainable increase in growth, rather than a temporary sugar rush – and reams of economic opinion on either side. Needless to say, there is no definitive answer: doing all the “work” through central bank activism rather than Government stimulus may or may not work.
But the point is that while “monetary activism” may well be George Osborne’s phrase, the Chancellor set himself specifically against changing the remit at the election. If you don’t believe me, look at the 2010 Conservative manifesto. At the very top of the top section of the manifesto – on the economy – just after pledging to cut the deficit, it said: “The independent Bank of England will continue to target 2 per cent CPI inflation”.
This was an explicit rejection of the many economists who, even back in 2010, were asking about whether the remit should at least be reconsidered, if not abandoned.
Changing the remit may well be the right thing to do. But make no mistake: it would represent a u-turn from the Chancellor, and the abandonment of another manifesto pledge.