A former governor of the Bank of England has warned that the UK faces a “more difficult” period of austerity than the one that followed the 2008 financial crisis in order to stabilize the economy.
According to Lord Mervyn King, the average person could face “significantly higher taxes” to fund government spending.
On October 31, Chancellor Jeremy Hunt will lay out his economic plans.
He has already repealed nearly all of the tax cuts announced by Liz Truss.
Mr. Hunt stated: “This administration will make the difficult decisions required to restore trust and confidence in our national finances.
“That means making impossible decisions.”
Lord King told Laura Kuenssberg on Sunday that “it is time to front up” to the public about the country’s difficulties.
“Public expenditure isn’t going down; if anything, it’s going up,” he said, “so taxes will have to rise to fill the gap that exists now.”
“That doesn’t paint a very happy picture for the next few years,” Lord King observed.
“But what we need is a government that will tell us honestly that there will be a decrease in our national standard of living because we’ve decided to help Ukraine and confront Russia, and that means that all of us will have to share the burden; we can’t just put it all on our children and grandchildren.”
‘Noticeably higher taxes’
Following the 2007-2008 financial crisis, when the banking sector was on the verge of collapse, the new Conservative-Liberal Democrat coalition government announced the deepest cuts in government spending since World War II.
When asked if the UK would face similar austerity measures, Lord King, the governor at the time, said, “In some ways, it could be more difficult.”
He stated: “The challenge is that if we want European levels of welfare payments and public spending, we cannot finance them with American tax rates, so we may have to accept significantly higher taxes on the average person.
“There isn’t enough money among the wealthy to recover it.”
Mr. Hunt has reversed nearly all of the tax cuts announced in the mini-budget in September. This included a 1p reduction in income tax due in April. A decision to reduce the top tax rate for people earning £150,000 or more had already been withdrawn.
However, uncertainty remains about public spending as the Conservative Party holds another leadership election to select a leader and prime minister to replace Ms. Truss.
Ms. Truss stated last week that she was committed to a Tory manifesto pledge made by then-Prime Minister Boris Johnson in 2019 to raise pensions in line with inflation.
The triple lock means that state pension payments will rise by the greater of inflation, average earnings, or 2.5%.
On Sunday, Rishi Sunak declared his candidacy for Tory leader and prime minister, promising to “deliver on the promise of the 2019 manifesto.”
“We have a majority and a mandate to deliver a true 2019 manifesto,” said leadership rival Penny Mordaunt. According to Business Secretary Jacob Rees-Mogg, Mr. Johnson is also expected to announce his candidacy but has yet to make a formal statement.
On Sunday, Lord King also criticized central banks for failing to control inflation, which is now at a 40-year high of 10.1%.
He claimed that major central banks, including the Bank of England, had continued to “print money” in order to support their economies during Covid lockdowns. He claimed that this had contributed to rising inflation.
Lord King served as Governor of the Bank of England from 2003 to 2013, during which time the Bank of England implemented quantitative easing. However, he noted a distinction between the time when major economies were dealing with the global financial crisis and the impact of Covid lockdowns.
“The purpose of engaging in quantitative easing in 2009 was to prevent the economy from entering another recession because the amount of money in the economy was decreasing,” he explained.
“In the last few years, the amount of money in the economy has grown at a rate that was bound to lead to higher inflation.”