Mervyn King supports coalition scheme to cut deficit

Bank of England Governor Mervyn King today backed Tory-Liberal Democrat plans to tackle Britain's record budget deficit this year.

In a ringing endorsement of the new coalition Government's economic policies, King said it was right to wield the axe immediately rather than wait until 2011 as proposed by Labour.

"We need to get on with it," he said.

European officials warned that under Labour the deficit in the UK was on course to hit 12% of economic output this year — the highest in Europe.

King said: "The agreement reached between the Conservatives and the Liberal Democrats is a very strong and powerful agreement to reduce the deficit and to take more action than was embodied in the Budget in the spring.

"It is essential to take measures this fiscal year to demonstrate the genuine commitment and determination of the new government. It's very important we convince financial markets this is definitely going to happen.

"It's not going to be easy. It's going to be a difficult few years as we face these adjustments."

King said the crisis in Greece showed that it "does not make sense to run the risk of an adverse market reaction" by delaying measures.

He said a failure to act would push up the cost of servicing UK debt and "would be damaging to the outlook for the economy".

The comments came as the Bank published its latest inflation report which predicted a pick up in growth but warned the recovery will be held back by tax rises and spending cuts as well as a shortage of bank lending.

The report also forecast inflation to remain above 3% in the coming months before falling back below the 2% target.

Economists said the "dovish" update supported the view that interest rates will not rise before the end of the year.