U.K. Needs ‘Ambitious’ Budget, Low Rates, CBI Says

By Svenja O’Donnell and Brian Swint

Nov. 20 (Bloomberg) -- Britain’s government must seek “ambitious” reductions in the budget deficit to allow the Bank of England to keep interest rates low, said Richard Lambert, head of the nation’s biggest business lobby.

“If we get a grip on public finances, then we can keep monetary policy looser for longer than would otherwise be the case,” Lambert, director general of the Confederation of British Industry, said in an interview in London. “If we keep nominal interest rates lower for longer, that would have an impact on sterling.”

Britain’s budget deficit in October was the worst for the month since records began in 1993 as the recession destroyed tax revenue. The Organization for Economic Cooperation and Development predicted yesterday that the shortfall will swell further next year, and said the Bank of England should seek to keep the benchmark interest rate at a record low until 2011.

“They should be ambitious,” Lambert, a former central bank policy maker said in the Nov. 18 interview to mark the CBI’s annual conference on Nov. 23. “The longer you wait, the harder it gets.”

The pound fell against the dollar and the euro today, heading for weekly declines. The pound dropped 0.5 percent to $1.6581 as of 9:16 a.m. in London, after earlier slipping to $1.6570, the lowest level since Nov. 12. It weakened 0.4 percent to 89.86 pence per euro.

Protecting Services

Prime Minister Gordon Brown and opposition leader David Cameron are both vying to win an election due by June by promising to cut borrowing without hurting key services. The U.K. faces tax increases and the deepest spending cuts since the country sought an International Monetary Fund bailout in 1976, according to the Institute of Fiscal Studies.

“We do face a major problem, a challenge that has to be addressed,” he said. “We have to be grown up about that.”

In April, the Treasury forecast net borrowing of 12.4 percent of gross domestic product, the highest since World War II. Concerns that Britain may lose its top credit rating as the recession persisted has undermined sterling, which has lost about 4 percent against a basket of major currencies since early August.

Brown this week proposed legislation that commits that government to halving the deficit in the next four years. The Paris-based OECD yesterday called for a more ambitious program to bring down debt once the once economic recovery takes hold.

‘Gentle Start’

A plan that is “not credible would certainly be if they try to spread the pain out any longer than it already is,” Lambert, a former Bank of England policy maker, said. “We go along with the idea of a gentle start, but we’ve been suggesting they should be more ambitious after 2012, and that they should seek to balance the budget by 2015 or 2016.”

The government has expanded spending to cushion the economy from the longest recession on record. The Bank of England has sought to simulate growth by cutting its interest rate to 0.5 percent in March, and by printing money with its bond purchase plan, currently totaling 200 billion pounds (332 billion).

The Monetary Policy Committee may decide not to increase its bond plan further as it gauges the effect of its purchases, said Lambert, a Bank of England policy maker from 2003 to 2006.

“They’ve done about 12 percent of gross domestic product,” he said. “There’s a case for saying ‘let’s see how that works out.’”

To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.