Britain faces a “difficult” era of austerity than it did after the financial crisis to stabilize the economy, a former Bank of England governor has warned.
Lord Mervyn King said the average person could expect “significantly higher taxes” to fund public spending.
Chancellor Jeremy Hunt is expected to present his economic plans on October 31.
He has already scrapped almost all of the tax cuts announced under Liz Truss.
Mr Hunt said: “This administration will make the difficult decisions necessary to ensure there is confidence in our national finances.
“That means decisions of breathtaking difficulty.”
Speaking to Laura Kuenssberg on Sunday, Lord King said “it is time to engage with the public about the difficulties” the country is facing.
He said: “Public spending will not decrease, if anything, it will increase, so taxes must increase to fill the gap that currently exists”.
- LIVE: Sunak confirms PM bid as Rees-Mogg says Johnson will run
- Who do Tory MPs support as the next Prime Minister?
“That doesn’t bode well for the next few years,” Lord King said.
“But what we need is a government that honestly tells us that our national standard of living is falling because we decided to help Ukraine and oppose Russia, and that means we all have to share the burden, we just can’t.” all passed on to our children and grandchildren.”
Asked if the UK could face a similar austerity phase introduced by then-Chancellor George Osborne in 2010, Lord King said: “In some ways it could be more difficult.”
He said: “The challenge is that if we want European welfare and public spending, we can’t fund it at American tax rates, so we may have to deal with the need to levy significantly higher taxes on the average person.
“The rich don’t have enough money to get it back.”
Mr Hunt reversed almost all of the tax cuts included in the September mini-budget. This included a 1p cut in income tax, which was due in April. A decision to lower the top tax rate for people earning £150,000 or more had already been thrown out.
However, uncertainty remains over public spending as the Conservative Party embarks on another leadership race to choose a leader and prime minister to replace Ms Truss.
Last week Ms Truss said she committed in 2019 to a Tory manifesto made by then Prime Minister Boris Johnson to raise pensions in line with prices.
The triple lock means that state pension payments increase by whichever is higher – inflation, average earnings, or 2.5%.
On Sunday, Rishi Sunak declared he was in the running to take over as Tory leader and prime minister and said he would “deliver on the promise of the 2019 manifesto”.
Penny Mordaunt, leadership rival, said: “We have a majority and a mandate to deliver a real manifesto for 2019.” Mr Johnson is also expected to announce his candidacy, according to Business Secretary Jacob Rees-Mogg, but has yet to make a formal statement hand over.
After the financial crisis, with the banking sector on the brink of collapse, the new Conservative-Liberal Democrat coalition government announced the sharpest cuts in public spending since the end of World War II.
On Sunday, Lord King also reiterated criticism of central banks for failing to contain inflation, which is now at a 40-year high of 10.1%.
He said major central banks, including the Bank of England, have continued to “print money” – through a measure known as quantitative easing – to support their economies during the Covid lockdown. This has contributed to rising inflation, he said.
Lord King was Governor of the Bank of England between 2003 and 2013 during which time he introduced quantitative easing. But he said there was a difference between that time, when major economies were grappling with the global financial crisis, and the impact of the Covid lockdowns.
“…QE in 2009 was intended to prevent the economy from going into another recession as the money supply in the economy dwindled,” he said.
“The money supply in the economy has grown very quickly here in recent years and at a rate that inevitably led to higher inflation.”
Add Comment