Don't blame me, Brown tells MPs, it's the Bank

Gordon Brown put himself at odds with the governor of the Bank of England yesterday when he rejected Mervyn King's assessment that higher taxes under Labour were to blame for the slowdown in the economy this year.

The chancellor refused to accept the governor's comments last month that the rising tax burden had led to a retrenchment in consumer spending and a weakening of the economy overall. Instead, Mr Brown told the Treasury select committee that more costly energy and interest rate increases by the Bank had been the main causes for the Treasury's halving of its growth forecast for the economy this year in Monday's pre-budget report.

Asked by the Conservative MP Damian Green whether he agreed with Mr King's assessment that the two-point rise in tax as a share of disposable income had played a part in reducing the economy's rate of expansion from 3.5% to 1.75%, Mr Brown said: "In retrospect, I think the governor would have talked about interest rates. They are bound to have an effect on consumer spending and the housing market."

On the day the Bank kept the cost of borrowing at 4.5%, for the fourth month running, the chancellor said that as a result of the independence granted to the Bank interest rates had been raised ahead of an election for the first time in Britain's recent history. The impact of higher rates had been compounded by smaller-than-expected rises in wages, he told MPs.

Yesterday's interest rate decision from the Bank came as little surprise to industry or the City. Both the Trades Union Congress and the British Chambers of Commerce warned of the dangers of delaying a cut in the rate but the Engineering Employers' Federation said the Bank's caution was justified given the current economic uncertainty. The Institute of Directors said the Bank had been neither "Santa nor Scrooge" but added that it expected the next move in rates to be down.

The chancellor told the Treasury select committee that growth would pick up next year and that criticism of his failure to get his growth forecast right was unjustified. Britain had been affected by twin shocks, he said: the tripling of the oil price since 2003 and the action taken to puncture inflation in the housing market following three years when price increases had averaged 15%.

The Conservative MP David Ruffley accused Mr Brown of "fudging" the figures so that his key golden rule would be met and called for an independent body to scrutinise fiscal decisions. Mr Ruffley said that, contrary to Mr Brown's assertions in the summer, the Treasury's "golden rule" would have been broken had the chancellor not extended the length of the economic cycle.

Under the golden rule, the government must balance its day-to-day spending with tax receipts over the course of an economic cycle, borrowing only to invest in infrastructure projects. Mr Brown extended the length of the cycle from seven to nine years in the summer, and to 12 years in the pre-budget report.

Mr Ruffley told him: "If you stuck to the original dates, you would have broken the golden rule." And referring to comments by the Institute for Fiscal Studies this week, which said the "economic cycle" was more like a "stretch limo", Mr Ruffley said: "It is not an economic cycle, it is a spin cycle."

But Mr Brown hit back and pointed out that the National Audit Office scrutinised the cycle and said the change had been "reasonable". He added that lower growth this year meant that the economic cycle would take longer to end. Rejecting the idea of an independent committee being set up, the chancellor said: "You do not hand over the responsibility for tax and spending to a body that would not be answerable to parliament. It is the government that is responsible for fiscal policy and I don't see much sense in handing over the decision to another body. It is one of the great principles of our democracy that only the House of Commons can pass taxes on to the people."