Mervyn King has said that he would not recommend any further stimulus packages for the economy, to try and rein in the UK's spiralling debt.
Speaking to MPs yesterday, the Bank of England Governor said: "I think it's right to accept that when the economy turns down and the automatic stabilisers kick in, so the increased benefit expenditures and lower tax revenues are bound to lead to higher fiscal deficits", the BBC reports. "So we are going to have to accept, for the next two to three years, very large fiscal deficits."
But, he added, "Given how big those deficits are, I think it would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits."
Warning that there are not sufficient funds in next month's Budget for another round of fiscal stimulus, he said: "I think the fiscal position in the UK is not one where we could say, 'well, why don't we just engage in another significant round of fiscal expansion'."
He also said that the previous stimulus package has not had the desired effect of encouraging the banks to resume mortgage
His comments are expected to limit how far Gordon Brown can go next week when he speaks at the G20 meeting in London about the UK's plans for dealing with the current economic conditions.
Mr King spoke as the Prime Minister is calling on world leaders to do "whatever it takes to create growth and the jobs we need."
Number 10 has dismissed the suggestion that Mr King's words will dampen the Prime Minister's plans, however, or that they have snuffed out any possibility of another fiscal stimulus.
"The governor clearly has a remit to look at overall UK economy specifically relating to meeting the inflation target of 2 per cent," a Downing Street spokesman told the Financial Times
But Patrick Wintour, political editor for the Guardian
, argued that while the Prime Minster will be infuriated by the Bank of England's
assessment of the UK economy, the Treasury will welcome the comments after the Chancellor Alistair Darling has been "discreetly arguing that the economy simply cannot risk any more state borrowing."
Liberal Democrat Shadow Chancellor, Vince Cable, said that the Governor's words, combined with the £12.5billion it "wasted" on an "ineffective and temporary" VAT cut means that the Government has "lost all credibility."
"Any fiscal stimulus will have to be repaid in the future and so should encourage growth today as well as creating assets for the long term," he said.
"If the Government wants to offer real help in the Budget to the millions struggling to make ends meet it should cut income taxes for those on low and middle incomes by clamping down on tax avoidance and closing tax loopholes exploited by the wealthiest."
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