Sunday, December 23, 2012
Big bucks for Carney. But can he deliver?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

More than two decades ago Richard Giordano, an American, became the first boss of a British firm, the industrial gases group BOC, to be paid £1m a year.

Now another North American, Mark Carney, Canadian governor-designate of the Bank of England, is blazing the trail for salaries in the public sector. He will get no less than £874,000 a year, including a £250,000 housing allowance.

This is the equivalent of the pay of 42 newly-qualified nurses though perhaps a fairer comparison is within the Bank itself, where the new governor will get more than Sir Mervyn King (£305,368) and Paul Tucker and Charlie Bean, his two deputies (£258,809 each), combined.

External members of the monetary policy committee, on £131,771 - £30,000 of which is intended for them to put into their pensions - may suddenly feel impoverished. External members of the new financial policy committee, on £55,000, are Threadneedle Street’s poor relations.

There are caveats. Carney, like external MPC members, must make his own pension arrangements. The Bank’s non-executive directors say including him in the generous but now-closed pension fund for King and his deputies would have cost at least 100% of salary. The cost of employing him would have been at least double King’s £305,368 salary. That does not, however, explain the big housing allowance.

The Treasury insists you get what you pay for and, in an internationally competitive market, securing a man George Osborne describes as “the outstanding central banker of his generation” is worth a significant public investment.

Certainly if the new governor had steered Britain through the crisis relatively unscathed, as with Canada and her banks, nobody would begrudge adding a couple of zeros to that salary. We will never know. The two economies are very different and we cannot have an exact re-run.

Carney will earn his salary and more, however, if he helps deliver the economic holy grail of non-inflationary growth alongside a safe banking system that supports such growth.

On the latter, he will inherit a system already undergoing far-reaching changes. The challenge is to combine banking safety, including higher capital requirements, with a sufficient supply of credit into the real economy. We are some way away from that.

As for the quest for non-inflationary growth, the challenge is just as great. Last week saw disappointing inflation figures, with consumer price inflation remaining at 2.7% in November, still stubbornly above the 2% target, and set to go higher.

Some analysts think King will have one final letter to write to the chancellor in the coming months, explaining why inflation has risen above 3%. RBS, in a new medium-term projection, sees inflation staying above the 2% target until the end of 2014.

The MPC, in its latest minutes, warned that inflation was likely to be above target “for the next year or so”, blaming factors such as higher domestic gas and electricity bills and university tuition fees that it could not directly influence.

Higher inflation, it seems, is bedding in. The Bank used to blame international factors, such as oil and food prices, for overshooting inflation. But the latest figures show that stripping out energy, food, alcohol and tobacco, inflation, at 2.6%, is very close to the headline 2.7% rate.

The service sector is where the damage is being done, with inflation of 4.2%. Indeed, the norm for prices rises in services looks to be between 3% and 5%. Only when goods prices are falling can service-sector inflation on that scale be consistent with a 2% inflation target. Goods prices are rising modestly but they are not falling.

Some say it does not matter much if inflation is higher: a year ago the Bank’s prediction was for 1.7% now. After all, is not growth a bigger priority than pinpoint accuracy in hitting an inflation target? Who is to say 3% rather than 2% is not an appropriate inflation rate for Britain?

Carney himself has been musing about a switch to targeting the level of money gross domestic product (GDP). Others favour a money GDP growth target, a combination of growth and inflation, which would potentially offer the central bank more flexibility. We favour flexibility in most areas of policy, so why not in this one?

There are circumstances in which the argument for this kind of switch would be unaswerable. Imagine if the Bank, in its determination to hit its inflation target, had been imposing years of unnecessary pain on the economy. If the target meant tens of thousands of lost jobs, it definitely would not be a price worth paying.

That, however, is not the case. The MPC has been bending over backwards and performing somersaults over the past 3-4 years, in its efforts to support growth.

It believed a combination of ultra-low interest rates, £375bn of quantitative easing and a 25% sterling depreciation would deliver the goods. Importantly, it continued to stimulate the economy even as inflation continued above target. It is hard to argue that it was in any sense constrained by the 2% inflation target.

A 3% inflation rate, combined with 5% growth in pay, average earnings, would upset some purists but be far from the end of the world. That, unfortunately, is not where we are, nor likely to be. Inflation of nearly 3% runs alongside earnings growth of under 2%.

The squeeze on real wages continues and the prospect of a sustained consumer revival remains stalled. It is instructive that higher inflation in October and November was accompanied by weaker retail sales.

The struggle will go on. King is unfortunate that his golden age of non-inflationary growth came early, as chief economist, deputy governor and then for part of his first term as governor, he presided over the best of times. But people will probably only remember the last few difficult years.

Nobody knows what shape the economy will be in when Carney gets to the end of his five-year term in 2018. Nobody really knows who will be in government.

If, by then, the economy has broken out of the pattern of stubbornly high inflation and disappointingly weak growth, Carney will get be a hero. But it looks like a long haul. And a change of target is not a sensible way to try to make it happen.