It is worth recalling the core points of The Indepdenent's manifesto and contrasting these with the Government's subsequent actions. We called for an immediate cut in interest rates to 5 per cent. The authorities have indeed cut rates, but in stages and so far only to 6 per cent. We well appreciated that there would be dangers in making a sharp cut and stressed that it would have to be accompanied by plans to tighten fiscal policy and to give the Bank greater independence to make it credible. But the sudden once- and-for-all cut would have a twofold advantage: it would calm the foreign exchanges by setting a floor from which, when approprate, rates would rise; and it would achieve the maximum impact on the economy. The authorities instead chose to make a series of staged reductions. By doing so they have managed to achieve the worst of both worlds. They failed to gain the impact that a sudden large cut would have made; and they set in train an expectation of a further string of cuts, which has helped undermine sterling. Thanks to this week's cut in interest rates by the Bundesbank the pound may have been rescued from free-fall. If so, the authorities have been luckier than they had any right to expect.
On fiscal policy we called for the introduction of legislation requiring the Treasury to balance the budget over the economic cycle. By making it clear that taxes would be increased (and/or spending cut) as the economy recovered, the Government would give credibility to the easing of its monetary policy. We have yet to learn how the Chancellor will frame his budget, but it absolutely imperative that he should put in place a broading of the tax base, so that as the recovery becomes more secure the Government's finances are brought under control. As it is, the national debt will virtually double over a period of five years, the largest such increase that will ever have taken place in peacetime.
Most depressing of all is the failure to tackle the structural weakness in decision- making. We called for an independent central bank and independent economic forecasting. Countries which separate fiscal and monetary policy generally achieve greater economic stability; countries which separate economic forecasting from policy-making are less likely to be temped to rig their forecasts. Yet all the Government has done is to make a some modest proceedural changes to Bank of England reporting, and appoint some outsiders to advise the Treasury forecasters. Even the recent top appointments at the Bank were carried out in a grossly unprofessional manner. The new Governor learnt of his appointment only two or three days before the announcement, while his deputy was told to take it (or presuambly leave it) on the spot. This is banana republic stuff: no medium-sized company would dare to run its affairs in this way.
It is no thanks to the policy-makers that the econimy is now staging a modest recovery. The OECD report on Britain this week concluded that Gorss Domestic Product was likely to grow by 1.4 per cent this year and 2.4 per cent next. But if the recovery was to be sustained 'the paramount need is to restore the credibility of counter-inflationary monetary policy'. Without that, a further bout of stop/go was in store.
Structurally there are several reasons to be encouraged by what has happened in Britian in recent years. The quality of the manufacturing base is increasingly admired by visitors, witness the enouraging report this week by a group of German industrialists, who found that some British factories combined the best of Japanese and German practice. Devaluation has given a new edge to our indsutrial exporters. The strength in service industry continues, and trade in services is growing twice as fast as trade in goods. There remain grave defeciences in education and training, but at least we are coming to be aware of our shortcomings. Yet all these structrual advantages will be squandered if central governments continue to make serious policy errors. The individuals - politicians, central bankers, Treasury mardarins - which gave us Black Wednesday, will duly get their knighthoods and pass on to other jobs. But if the structure of Government decision- making is wrong their successors will go on making mistakes. That is why we called for change. That is why change is vital.Reuse content