King backs Cameron budget plan as BOE lowers outlook

Aug. 8 (Bloomberg) -- Bank of England Governor Mervyn King signaled continued support for Prime Minister David Cameron’s budget squeeze as he cut forecasts for economic growth and said Britain’s recovery will be a “slow process.”

“If you go back to 2010 when the rebalancing program was put in place, that looked pretty sensible,” King told reporters in London today. The plan’s three main elements “still seem to me exactly the right three things,” he said.

The government’s spending cuts, along with the euro-area debt crisis, have curbed demand in the U.K. While the economy shrank the most in more than three years in the second quarter, Cameron and Chancellor of the Exchequer George Osborne have pushed back against calls from the opposition Labour Party to scale back the fiscal program, saying it is needed to insulate the country from the euro-area debt turmoil.

King was speaking after publishing the central bank’s quarterly Inflation Report, which included forecasts showing annual gross-domestic-product growth of about 2 percent in two years. That compares with a projection in May of 2.5 percent.

Asked whether the government should have a “plan B” for the economy, King said “no,” and then detailed his backing for the main elements of the deficit-reduction program; cutting public spending, focusing on tax rates and allowing automatic stabilizers -- which can mitigate downturns -- to take effect.

He said while the government has cut spending faster than planned, contributing to a weaker-than-expected economic performance, “that means there’s less consolidation to do in the future.”

Exaggerated Weakness

The Bank of England also said in the report that while one- time factors exaggerated the second-quarter contraction, the economy is likely to remain subdued in the near term. Britain faces a struggle to recover from a double-dip recession amid the efforts to cut the budget deficit and the euro-area debt crisis.

It said the outlook for the U.K. growth is “unusually uncertain” and the greatest threat “stems from the risk that an effective policy response is not implemented sufficiently promptly in the euro area.”

“Many of the conditions necessary for a recovery are in place, and the Monetary Policy Committee will continue to do all it can to bring about that recovery,” King said. “As I have said many times, the recovery and rebalancing of our economy will be a long, slow process.”

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