BoE’s King applauds government tax, borrowing plans

Bank of England Governor Mervyn King on Tuesday applauded the British government's pre-budget plans to stimulate the flagging economy with a package of tax cuts and debt-funded government spending.

King told parliament's Treasury Committee that he had been keen to see a stimulus package which met two conditions — that measures were temporary and that a return to fiscal sustainability was mapped out.

"I think the announcements made yesterday meet those two conditions," King said. "The measures that have been taken to stimulate activity are temporary… and…there was a path back to fiscal sustainability."

British Finance Minister Alistair Darling announced a 20 billion pound ($30 billion) stimulus package on Monday, cutting Value Added Tax to 15 percent from 17.5 percent, forecasting borrowing would rise to 118 billion pounds next year.

But Darling said tax rises would need to follow in 2011 to help pay back some of the debt.

King warned that rebalancing the economy would be a tough task. "That path is long and hard," he said.

"The implied ratio of debt to national income only starts falling in 2015/2016, which is a very long way away…That is an indication of how serious the fiscal position is at present."

King's colleagues on the BoE monetary policy committee also gave Darling's plans a cautious welcome.

Deputy Governor Charles Bean praised the decision to cut VAT rather than income tax, saying it was more likely to encourage consumers into the shops.

"A temporary cut in income tax is likely to be saved … a cut in VAT at least gives households an incentive to bring forward some spending," he said. "In that sense…it's quite a sensible measure to go for."