Sir George presses Prime Minister on level of sterling
12 Feb 2009
Below is the exchange between Sir George and the Prime Minister at the recent meeting of the Liaison Committee

(This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.)

Q103 Sir George Young: Prime Minister, can we go back to an answer you gave to an earlier question when you outlined the measures that have being taken to cope with the recession, and you said that, with limited exceptions, everything the UK had done was being copied in the rest of the world. One of the limited exceptions is the reduction in VAT, is it not?
Mr Brown: I am very surprised that you wish to raise this.
Q104 Sir George Young: That is not an answer to the question. Has anyone else copied it?
Mr Brown: There are different measures that have been taken in different countries to boost consumption.
Q105 Sir George Young: But no one has actually cut VAT?
Mr Brown: Some people have frozen VAT rises but nobody has cut VAT, as I understand it. I think you will find that our measure is actually working. I just do not understand how political parties in this country see it to their advantage to say that the cutting of VAT and giving people consumer power is such a bad thing to do. That is exactly the way that you get money into people's pockets so that they can, with more confidence, spend during the period of a downturn.
Q106 Sir George Young: Many European finance ministers have taken a totally different view and said that there are better ways of spending the money than that.
Mr Brown: Some people in your own party have taken a different view. I think you have got to be a bit more balanced in the way that you approach this.
Q107 Sir George Young: Can we move on to how this is all going to be paid for. If you look at the holding of government gilts, roughly one third are held overseas, about £150 billion, and if you look at the Pre Budget Report, the Government is going to have to borrow about £630 billion in gilts over the next five years. Have you not got to have a look at the impact of this on sterling? Can I just quote what the Deputy Governor of the Bank of England said one possibility for sterling was that "external investors lose faith in the policy framework that the UK operates under..." Does that not have to be a constraint on what you can do in coping with some of the internal pressures for reflation?
Mr Brown: But the policy framework is the right one. Look, you have got to understand that what has happened is that monetary policy has lost its ability, because of the downturn, to have the impact that it normally should have. In these circumstances, as the Governor of the Bank of England has himself advocated, what is left to the Government is to use fiscal policy. I think you would agree with me that almost every government in every part of the world is now using fiscal policy to do so. We are in a position to do so because we have lower national debt than many other countries, not higher national debt. I would appreciate it if people recognise that debt levels are higher in France, Germany, Italy, Japan and America, and we are in a position, in what is a very difficult circumstance, to borrow to enable us to take us through this downturn.
Q108 Sir George Young: I understand that but is not one of the constraints on fiscal policy the impact on the exchange rate? If you look at the risk premium that is factored into holding sterling, it is widening as compared with other countries' steps. If you look at what the President of the ECB says: "If you augment too much of your own borrowing, you might be punished by the markets. If you are at the limits of what you can do, you lose more with the absence of confidence and loss of ability to proceed than you would from the simple additional spending." In other words, if you reflate and you lose confidence in your currency, you are worse off than if you stayed where you were.
Mr Brown: I am sorry to disagree with you. I know there is this new penchant to quote Europeans all the time to justify a particular case. I do say to you this: first of all, we are not targeting sterling. That policy of trying to fix the exchange rate was not successful, whether it was shadowing the Deutschemark or shadowing the ERM, or then in the ERM; it was not successful. As far as confidence in the British economy is concerned, the Chief of the Debt Management Office has just said in the last few days: "The amount of debt we are raising is sustainable. The market has shown the ability to absorb the much bigger amount of issuance." Faced with a situation where in America the fiscal stimulus is far bigger and where in Europe every country, including countries which decided that they did not want to do it originally, are now doing this fiscal stimulus, I have to say to you that in the conditions that we face at the moment, which is essentially a global banking crisis that has deprived the economy of liquidity and then the economy of funding, and where monetary policy cannot have the impact that it normally has, the responsible and the prudent thing to do is to use fiscal policy to take us through these difficult circumstances.
Q109 Sir George Young: Without any regard to the impact on the exchange rate?
Mr Brown: We do not target the exchange rate.
Q110 Sir George Young: That was not the question.
Mr Brown: I am not going to get into a situation which previous Governments have got into where they make statements about the exchange rate in a way that is damaging to the British economy. I think if you reconsider what you have said, you would be careful about making those statements as well.
Q111 Sir George Young: Can we move on to the IMF. I assume that you have no plans to go to the IMF. You hope that you do not have to, but is it something that you can rule out?
Mr Brown: I think the level of discussion about the position of Britain and the position of every economy in this world is reaching an absurdity when people make these comments or statements. Look, we are an economy with a low level of debt and with low inflation, and we are an economy that has low corporate debt outside the financial sector. We are a country that is investing substantially in our future in a way that is designed to give us the jobs and the industries of the future. Every country in every single continent of the world is facing these problems. If I told you that yesterday China announced that they had a fall of 41 per cent in their exports in January and that Japan had a fall of 20 per cent in its industrial production in the last three months, this is a global crisis, and the idea that this is a unique British phenomenon that requires us to take measures that are quite extraordinary for our times is just simply ridiculous.
Q112 Sir George Young: Can I quote what the Managing Director of the IMF said at a seminar earlier this week, which I think you were at: "The IMF has bailed out a number of countries but there will be many others in need of help in the months ahead." The IMF has also said that the UK is facing the most severe slowdown of all developed economies. Against that background, how can you be quite so confident that we are not going to face troubled waters?
Mr Brown: I think you are doing yourself a disservice by the way you are putting these questions. Everybody knows that the debt level of the United Kingdom is lower than other countries. In other words, we are able to afford the borrowing that we are undertaking. Everybody knows also that all the other continents of the world are facing problems that are similar to ours as a result of what is a global banking crisis. This attempt you are making to make this somehow a uniquely British phenomenon, that has got British causes only and British ministers or British Governments to blame, is a disservice to actually getting to the heart of what is the problem and how we deal with it. This is a global banking system that melted down. It is a freezing of global financial markets. We are all trying to get out of this situation by dealing with the problems of our banks and these are banks in every country of the world. The problem is that our banks are so international that national regulation systems cannot deal with this on their own, and that is why we need international co operation. I think it is a disservice to our country to try and suggest that this is a unique British phenomenon, because it is clearly not.
Sir George Young: I think against a background of previous problems that Labour Governments have had on the foreign exchange front, these are wholly legitimate questions to put to a Prime Minister.

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