Gordon Brown has said the Bank of England will be vulnerable to populist demands to “take back control” unless elected politicians accept joint responsibility for heading off future financial crises.
The former prime minister called for the creation of a joint Treasury-Bank of England strategic oversight group to assess risks to the economy, saying it was unfair for Threadneedle Street to be blamed for policy failures in areas it did not control.
Speaking at a conference to mark 20 years since his decision to grant the Bank independence in 1997, Brown said the shock announcement within five days of Labour being elected had been vindicated.
But he said the backlash against globalisation prompted by the financial crisis meant leaving decisions solely to experts was not feasible.
The Bank should also not meddle in areas that were the exclusive preserve of politicians, Brown said, launching a strong public attack on its calls for action to reduce Britain’s budget deficit during the deep recession of a decade ago.
Brown said the Bank had been too slow to cut interest rates during 2008, leaving them at 5% when the economy was in recession. He added that the contrast with the more proactive approach taken by the US central bank, the Federal Reserve, was “almost unbelievable”, but he had kept quiet for fear of jeopardising the still fragile independence of the Bank.
“A few months later, the Bank was trying to tell the government what to do about fiscal policy,” Brown said, adding that Labour had needed to cut taxes and raise public spending because Threadneedle Street had refused to act under its then governor Mervyn King.
It was “unacceptable” for the Bank to attempt to instruct ministers in how to handle fiscal policy, especially in the changed political climate since the financial crisis, he added.
“If we do not understand that in an democratic system you’ve got to get the right balance between expertise, accountability and leadership, then anti-globalisation protests will rise,” Brown said.
As a result, those people who are taking decisions, perhaps even the right ones, will be blamed as the take back control movements gain even more support in the years to come.
The former chancellor George Osborne gave the Bank sole responsibility for financial stability after abolishing Brown’s tripartite oversight system, in which responsibility was shared by the Treasury, the Bank and the Financial Services Authority.
But Brown said it was wrong for there not to be a strategic oversight group that involved the Treasury, noting that there were sectors of the economy, such as the supply of houses, where the Bank had no control.
“You can’t have stability without the Bank, but you can’t have stability without the Bank and the Treasury working together, either,” he said. “No matter how superhuman the governor is, it is not fair to leave the Bank exposed in this way.”
Brown said he had been planning the Bank’s independence for two years before the 1997 general election. He added that the depoliticisation of interest rates had kept Britain out of the single currency, because it had created a better monetary regime than that of the eurozone.
“Independence for the Bank of England has been not just been a technical success, but also avoided many of the problems that might have taken us into the euro early, and pushed us out of the euro very quickly afterwards,” he said.