U.K. Conservatives Say Brown Risks `Run on Pound' With Deficit

By Mark Deen

Nov. 15 (Bloomberg) -- Britain's opposition Conservative Party said Prime Minister Gordon Brown is running the risk of a ``collapse'' of the pound by allowing the U.K. government deficit to swell.

``We are in danger, if the government is not careful, of having a proper sterling collapse, a run on the pound,'' George Osborne, who's responsible for the Conservatives' economic, said in an interview with The Times newspaper.

The comments are the first from a senior U.K. politician to raise the specter of a currency crisis comparable to those suffered by Britain in the 1970s or early 1990s, or to indicate that the British currency may suffer a fate similar to that of Iceland's in recent weeks.

The pound has already shed more than a quarter of its value in four months, declining to less than $1.50 this week from more than $2 in July. It has dropped 20 percent this month alone against the euro, currently buying about 1.16 of the European currency, down from almost 1.27 at the end of October.

In 1992, when the currency broke its peg to others in the European Union, the pound fell from $2 on Sept. 8 to less than $1.50 in the final week of December. In September that year, it fell 10 percent against the Deutsche mark, the largest European currency before the creation of the euro.

With Britain's budget deficit already the largest since the end of World War II in the six months through September, Brown is preparing to announce a further increase in borrowing in the government's pre-budget report on Nov. 24.

Keynes Parallel

Speaking at the Council of Foreign Relations in New York yesterday, Brown mocked skeptics, noting that economist John Maynard Keynes was criticized by U.K. Treasury officials in 1929 for proposing increased government spending to help fight what became an economic depression that lasted until the 1930s.

Brown said that when he was directly in charge of Britain's finances as chancellor of the exchequer, he went into the Treasury's library and found a copy of Keynes's 1929 proposal marked ``inflation, extravagance, bankruptcy'' by the civil servant in charge of the department at the time. The reference drew laughter from the crowd and Brown suggested that avoiding Keynesian policies now could also lead to depression.

The anecdote was meant to bolster Brown's case to world leaders for fiscal stimulus to ward off a global downturn. Brown is pressing the Group of 20 nations to slash taxes and raise spending at a summit in Washington today.

Such an agreement would give him political cover to take such actions in the U.K., where the government's shortfall was already 37.6 billion pounds in the six months through September, the largest since 1946. Osborne told the Times that expanding the deficit further carries risks.

Long-Term Rates

``The danger'' is that borrowing ``pushes up long-term interest rates, which is a huge burden on the economy,'' Osborne told the Times. ``The more you borrow as a government, the more you have to sell that debt, and the less attractive your currency seems.''

Bank of England Governor Mervyn King said this week that the government's plans were correct, as long as they were ``temporary.'' The stimulus is justified because of the ``extraordinary'' economic circumstances the U.K. and the world are facing, he told journalists three days ago.

``I've been pressing for immediate fiscal stimulus,'' Brown told journalists in Washington late yesterday. Governments ``need to move on fiscal policy'' to reassure people about their jobs and homes, he said.

Osborne criticized Brown, saying his plans to pump up the economy were aimed more at winning the next election, which must be held by mid-2010 at the latest.

`Scorched Earth'

Brown ``doesn't care'' how much he borrows,'' Osborne told The Times. ``His view is he probably won't win the next election. `The Tories can clear this mess up after I've gone.' That is deeply irresponsible. It's a scorched-earth policy, which I think the history books will write up as a total disaster,'' he said, according to the newspaper.

Politically, Brown has benefited from the financial crisis of recent months, with some polls showing his popularity increasing after he devised a bank bailout plan that was copied by other countries.

Osborne, in contrast, has suffered, with newspapers reporting yesterday that Conservative leader David Cameron may strip him of some of his responsibilities within the party.

Now, by raising the issue of a falling pound, Osborne is seeking to damage Brown in the way that the Conservative government of John Major was damaged in 1992 by the sterling crisis of the time. The episode helped rob the party of its reputation for competence on the economy, contributing to its ejection from office after 18 years in the 1997 election.

To contact the reporters on this story: Mark Deen in Washington at markdeen@bloomberg.net