How Brown's bungling could pose a threat to the pound

published 14 July 2006

Would Gordon Brown be such a shoo-in to be the next prime minister if he hadn't given the Bank of England its independence on almost his first day in office? I doubt it very much. Almost everything else he has done since then has been at best a mess. Look at the tax-credit fiasco, which has seen some of Britain's poorest families pursued for thousands of pounds of overpayments; or the tax grab on pension funds that has virtually wiped out Britain's company defined benefit schemes; or his endless tinkering with the tax system, which has doubled the number of pages in the tax code.

The beauty of his Bank of England masterstroke was that it allowed him to present himself as a sound money man. That won over the City and reassured the middle classes. It didn't matter that, at heart, Brown remained true to his socialist roots, with his unshakeable belief in the virtue of an all-powerful state. They knew that socialists have historically destroyed far more wealth and wreaked far greater havoc on the economy as a result of inflation than they ever have through punitive taxation. The Bank of England is the goose that has laid Brown's golden political eggs.

Monetary Policy Committee: new members

That makes it all the more surprising that Brown should be so reckless with the Bank now. The Bank's Monetary Policy Committee the body responsible for setting UK interest rates is down to just seven members out of its full complement of nine. This follows the death of David Walton last month and the resignation of Richard Lambert, who left to run the CBI three months ago. The rules state that it's up to Gordon Brown to appoint their successors, since he chooses the four outside members. His choices will be central to the continuing credibility of the Bank and its ability to command the confidence of the markets.

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But judging by recent experience, it's not clear Brown takes his duties as seriously as he should. Sir Andrew Large was appointed to the committee after a ten-minute phone interview and given 24 hours to decide. The newest recruit, David Blanchflower, said the whole selection process took ten days. There are also doubts about the expertise of the newest members. Richard Lambert wasn't a trained economist, while Blanchflower is best-known for his research into the role of sex in promoting happiness.

Monetary Policy Committee: appointment procedure concerns

Not surprisingly, there is now real alarm in the City over the way appointments to the Monetary Policy Committee are made. Even Mervyn King, the Governor of the Bank of England, has felt moved to speak out publicly, calling for the Chancellor to speed up the process.

But the suspicion is that Brown has lost interest. Now that the two Treasury officials most closely involved in setting up the Monetary Policy Committee have moved on Gus O'Donnell, the former permanent secretary, who is now cabinet secretary, and Ed Balls, Brown's loyal sidekick, who is now a minister himself the issue has dropped off his radar. Either that, or he is struggling to find suitable ie, reliable Brown-supporting candidates.

What should be done? There have been calls to reform the selection process, taking the decision out of Brown's hands. George Osborne, the shadow chancellor, last week called for a formal recruitment process (the job currently isn't even advertised), with the final decision to be given to the Treasury select committee.

Monetary Policy Committee: devalued?

But even this may not be enough to attract the heavyweight candidates needed to maintain the Bank's reputation. There are also problems of cash and cachet. The first is obvious enough. Monetary Policy Committee members get an annual salary of only £90,000. That's peanuts compared to a City economist. It's also likely to be far less than a top academic economist can earn advising hedge funds. That would not matter so much if the Monetary Policy Committee still had sufficient glamour. But that's lacking these days too. Top economists want to work on the

big issues, such as global trade imbalances and the emergence of China, not worry about UK mortgage lending. Compared to the US Federal Reserve or the European Central Bank, the Monetary Policy Committee looks increasingly like a backwater.

Worse, this drift comes at a tricky time for the Bank. The UK trade deficit is growing, household debt is rising, and inflation is picking up. Meryvn King has warned that we could be in for choppy times ahead. Policymaking is going to get more difficult. All the more important, then, that the Monetary Policy Committee recruits the best outside talent to keep the markets onside. Instead, Brown's actions or lack of them threaten to jeopardise the credibility of the Monetary Policy Committee. In time, that could shake confidence in the pound. Brown may be the first Labour chancellor to avoid devaluing sterling. But in devaluing the Monetary Policy Committee, he may be leaving that fate to his successor.