Treasury Select Committee: Posen voices doubts about Osborne’s Plan B
Bank of England Monetary Policy Committee member Adam Posen has voiced concerns about the government’s fiscal austerity measures during a hearing of the Treasury Select Committee.
Dr Posen was asked my Chuka Umunna MP to confirm whether the current fiscal contraction was the most severe in any developed country. He replied by describing it “rare that an austerity programme is this large”, adding that “it is unusual for an economy to be contracting this much when it is not yet under crisis”.
Chancellor George Osborne has ruled out altering his fiscal consolidation plan if growth remains stagnant and it is widely believed that a further round of quantitative easing is the Chancellor’s backup plan if growth remains stagnant.
Following the US Federal Reserve’s injection of $600billion (£370bn) into the US economy through a round of quantitative easing earlier this month, Mr Osborne hinted that a further round of quantitative easing could be in the pipeline, telling the Treasury Select Committee on November 4:“The Governor of the Bank of England has observed that robust fiscal policy gives more flexibility to monetary policy, and that is the principle I take to economic policy-making”
Business secretary Vince Cable said in an interview with BBC Radio 4’s Today programme on Monday 25 October said: “There is flexibility already built into government policy, certainly in fiscal policy, to go to five rather than four years; there’s an opportunity to use monetary policy to maintain demand.”
Given that interest rates remain at a record low level, using monetary levers to stimulate the economy would strongly imply a further round of quantitative easing.
Under questioning from Chuka Umunna MP on the Treasury Select Committee today Monetary Policy Committee Adam Posen was asked: Is there any size of fiscal contraction in the current climate which couldn’t be compensated for by quantitative easing?
Dr Posen replied:
“It is my personal assessment that the short-term effects of the government’s fiscal plans will be quite contractionary. That is why in my statement to the committee and in the last minutes of the inflation report I differed from the majority forecast of the committee.
“Could monetary policy fully make up for this through quantitative easing? Probably, but not certainly. We all have different choices about where we think the uncertainty lies.
“I am less certain than some of my colleagues about the impact of quantitative easing. I believe it is helpful but I do not have full confidence that if we go full bore from here on it it will be as effective as it has been in the past.”
Commenting after the hearing, Mr Umunna said:
“Today, a leading member of the Monetary Policy Committee has highlighted the serious questions which remain on the Chancellor’s Plan B and whether the government can rely on quantitative easing as a backup if its austerity package produces sluggish growth.”
