ALLOCATING TEMPORARY FISCAL POWERS
TO THE BANK OF ENGLAND
54. Earlier in this Report the possibility of 'leaning
against the wind' and keeping interest rates higher than might
otherwise be needed in order to stem the growth in asset prices.
However, as Mr Barrell stated, this would come at a cost, in that
"Holding interest rates higher than they otherwise would
have been in order to deal with debt and to deal with asset prices
and those risks means holding them higher than they really need
to be to hit full employment immediately, so there is a choice,
To counter this trade-off, Professor Wren-Lewis suggested to us
that the Bank be given control of certain fiscal policy instruments
in order to target certain sectors of the economy, such as housing,
where imbalances have built-up. He stressed that this policy proposal
was "for the long term. I am not suggesting that this is
something that should happen overnight."
Professor Wren-Lewis acknowledged that "the interest rate
is the instrument", but went on to say that "the question
is whether you might want to supplement it on quite rare but important
occasions by giving limited temporary control of certain fiscal
instruments to the Bank".
55. The reaction to this policy suggestion was not
positive. Professor Congdon disagreed with the notion of handing
elements of fiscal policy to the Bank, telling us he was "strongly
opposed to reactivating fiscal policy and I think that there are
very fundamental disputes about what causes the economy to move".
He went on to say "Monetary policy is the effective instrument
and recognising that has been crucial to the success of the MPC".
Professor Muscatelli did not agree with the policy proposal of
allocating certain fiscal measures to the Bank on the grounds
that that he was worried about the "democratic deficit"
created by such a move. He thought closer cooperation between
the Bank and the Treasury ought to be the answer.
56. When asked whether the Bank ought to be given
control of fiscal policy instruments, Lord George replied:
I certainly would not want to put the bank in the
position of managing fiscal policy as well because the considerations
go way beyond economics. They have to balance social as well as
economic concerns and that is the job of elected politicians.
It is not a technical job like that of the Bank of England, so
one must have much more input into that.
He highlighted the lack of a democratic deficit for
such a move, telling us the Bank "should certainly not be
able to veto decisions or insist that politicians behave in a
certain way. I should like to point out that we live in a democracy."
We see no merit in the case for the Bank of England being given
control of any elements of fiscal policy, which should properly
remain the province of elected politicians accountable to the
House of Commons.