It's starting to unravel for Gordon Brown and his 'smoke and mirrors' economic policy............
"It is time the Chancellor admitted that all is not well in the British economy and time he started addressing the long-term challenges," Mervyn King said.
King blames Brown for economic slowdown
FRASER NELSON POLITICAL EDITOR. The Scotsman
Key points :
· BoE Governor says tax rises curbed consumer spending · Mervyn King linked the 2002 Budget with a decrease in disposable income · Gordon Brown has conceded that his economic forecast will not be metTHE Governor of the Bank of England yesterday blamed Gordon Brown's tax rises for slowing down Britain's economy as he issued fresh forecasts predicting the lowest growth rate for 13 years.
In unusually candid remarks, Mervyn King singled out tax rises in the Chancellor's 2002 Budget as he linked the high street slowdown to shoppers whose net pay has been cut as the tax haul rises. The Bank now expects economic growth of 2 per cent for this year - adding to the cascade of data suggesting that Mr Brown is being hopelessly optimistic by predicting growth of 3-3.5 per cent.
Mr King focused on consumer spending, which has for years kept the UK economy afloat as homeowners saw their assets soar, while cheaper imports reduced prices - and left more disposable income. But this has sharply reversed, slamming the brakes on the UK economy. While energy prices have been rising, Mr King singled out the higher taxes, which have forced households to tighten their purse strings.
The share of the economy consumed by the government rose from 40 per cent in 2002 to a tax burden of 41.6 per cent this year, as Mr Brown raised more tax to help fund his spending bonanza. "The ratio has gone up by almost two percentage points," Mr King said. "This has contributed to the sharp slowing in real household disposable incomes in the second half of 2004."
Under such circumstances, he said, it was "not surprising" that "households spent less". If consumers had less to spend on the high street, he said, then "the increase in the ratio of taxes to incomes has been quite a significant part of the story". He stressed that council tax was not to blame.
"Over the past two years, the ratio of council tax to disposable income has not gone up enormously. The biggest change has been income tax and national insurance payments," he said.
Such a focus on the Chancellor's policy was highly unusual from Mr King
- and delighted the Conservatives, who seized on his remarks as proof of a consensus that Mr Brown is grinding the economy down. George Osborne, the shadow chancellor, said the Treasury would have to tear up its forecasts yet again.
"It is time the Chancellor admitted that all is not well in the British economy and time he started addressing the long-term challenges," he said.
The Treasury pointed to its new system of tax credits, which means an average single-earner family with two children pays marginally less of the salary in tax. It did not respond directly to Mr King's remarks.
The Chancellor has conceded that his economic forecast will not be met
- but has pointed to the soaring oil price, rather than higher taxes, to explain why it will be sharply below his range of 3-3.5 per cent. If the UK grows at 2 per cent this year, as expected, it would be the slowest rate since 1992, when the economy was crawling out of recession and grew just 0.3 per cent.
When Mr Brown delivers his pre-Budget report - expected early next month - he will face Tory accusations of a slowdown induced by his policy of raising taxes. He will also be unable to compare Britain favourably with other countries as the economy will be outpaced by Greece, Ireland, Norway, Poland, Spain, Sweden and Turkey.
Scotland's economy is set to grow by an even slower 1.8 per cent this year, according to the Fraser of Allander Institute. This figure, however, is seen by the Executive as a success as it is closer to the UK economy.
Mr King did not alter his inflation forecasts, dampening hopes of an early cut in interest and mortgage rates.