Forget Sniping with Treasury, Mervyn's Big Worry Is Debt; as Markets Lose Confidence in UK Public Finances, the Fear Is Sterling Could Slump and Interest Rates Soar; ECONOMIC ANALYSIS

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Byline: Hugo Duncans

MERVYN King famously said his ambition as Governor of the Bank of England was to be "boring". In the past few days, he has been anything but.

His attack on the "truly extraordinary" levels of Government borrowing was as unprecedented as it was damning.

His call for a "clear plan" to reduce the debt infuriated the Treasury and led to accusations he was in cahoots with the Tories.

And his bombshell complaint that he has not been consulted ahead of the Government's imminent White Paper on financial services exposed a growing divide between the Bank of England, the Treasury and the Financial Services Authority.

Three-legged stools are supposed to be stable, but this tripartite system of financial regulation is on the verge of collapse.

The rift is making headlines, but it is also serving to overshadow a key message King is eager to get across - the public finances must be repaired in line with the state of the economy.

"One of the points that doesn't attract sufficient attention in the public debate is that the speed at which the fiscal stimulus should be withdrawn has to be dependent on the state of the economy," he told MPs on the Treasury Select Committee last week.

"There is no point in presenting a profile for the reduction in deficit that is independent of the state of the economy. It has to be dependent on the state of the economy. That is not easy to get across but I think it is a very important part of the debate." In other words, if the recovery is strong, the debt must be reduced fast, through spending cuts or tax rises or both. If the downturn persists, it will take longer to reduce the deficit.

In the Budget in April, the Chancellor forecast borrowing to fall from a peak of [pounds sterling]175 billion this year, or 12.4% of GDP, to [pounds sterling]97 billion in 2013-14, or 5.5% of GDP.

King does not think this is fast enough, given the Chancellor's economic growth forecasts of a 3.5% decline in output this year followed by a bullish 1.25% rise next year and 3. …