A dangerous juggling act

Personal Finance

THE SIGHT or sound of Eddie George and Kenneth Clarke rowing like an old married couple over interest rates would almost be funny if it were not potentially so serious.

So far, the Bank Governor's demand for a rise in interest rates to counter incipient inflation regardless of the impact on the economy and the electorate - while the Chancellor blandly ignores the promises he made only last year to listen to the Governor's opinions - has signally failed to upset the markets.

Shares, sterling and government securities have all held up well to the latest warnings in the Bank of England's Inflation Report.

But this is largely due to the fact that UK investors want to believe the Chancellor is right. Influential market analysts believe that interest rates in most other advanced economies are likely to go down and help take the pressure off the pound if the Chancellor refuses to do what the Governor tells him markets require. Finally, and perhaps fortuitously, the OECD has given the UK economy a clean bill of health in the past week.

Any decision to raise rates is unlikely to be taken until after the Chancellor and Governor next meet, which is not until the very end of this month. For the time being, there is every chance that the Chancellor can and will, rightly in my opinion, ignore the carping of a man whose job is to see only one side of the inflation and interest rates/ economic growth and interest rates coin.

The most we are arguing about is a few tenths of a per cent of inflation over target, and it would be ridiculous of the Chancellor to wreck a recovery which is already slowing for such a pedantic and small-minded objective.

It was fairly ridiculous of him to give the Governor the opportunity to upset the apple-cart in the first place, but that is another story. Let us give the Chancellor credit where credit is due.

But the markets are unlikely to be so forgiving if Mr Clarke holds down interest rates and then tries to cut taxes in the Budget, which is now less than four months away. He is under intense pressure to do so from Tory backbenchers desperate to stop their seats going the way of Littleborough and Saddleworth, and also from the hard right, which sees tax cuts as the best way of forcing the Chancellor to rebalance the books by slashing away still further at Government spending.

But further spending cuts will not be that easy to find, as John Redwood discovered when pressed to say how he would achieve savings as Prime Minister. Economic growth is unlikely to provide a painless answer either. The economy has already slowed down, and the flow of tax revenues has been reduced to the point where the public sector borrowing requirement is running well above the level needed to meet the Chancellor's own target of cutting it by a quarter, to pounds 26bn, in the current financial year.

He can tinker with taxation, and it would be electorally rewarding to try and revive the housing market with judicious concessions. But he cannot expect to cut the overall level of taxation in November without the market noticing that an unsustainable pre-election boom is being engineered.

If tax cuts are not paid for by cutting spending programmes, they will have to be paid for by raising interest rates, and even that might not be enough to placate those unforgiving markets. Even if tax cuts and interest rate rises were a fair and equitable trade-off, which they are not, it would be an unacceptable risk to take.

The Chancellor certainly cannot expect to cut both interest rates and taxes this autumn. Given a choice between them, he should give priority to interest rates.

Suggested Topics
News
people

Actress sees off speculation about her appearance in an amazing way

Arts and Entertainment
The last great picture - Winner 'Black and White' and overall 'Wildlife Photographer of the Year'
art
Voices
'Irritatingly Disneyfied': fashion vlogger Zoella
voices

News
Carl Bernstein (left) and Bob Woodward (right) with former 'Washington Post' executive editor Ben Bradlee
people

The Washington Post editor helped Bob Woodward and Carl Bernstein bring down President Nixon

PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
tech

Board creates magnetic field to achieve lift

News
There have been various incidents of social media users inadvertently flouting the law
news

Life and Style
Stack ‘em high?: quantity doesn’t always trump quality, as Friends of the Earth can testify
techThe proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
News
Bourgogne wine maker Laboure-Roi vice president Thibault Garin (L) offers the company's 2013 Beaujolais Nouveau wine to the guest in the wine spa at the Hakone Yunessun spa resort facilities in Hakone town, Kanagawa prefecture, some 100-kilometre west of Tokyo
i100
Sport
CSKA Moscow celebrate after equalising with a late penalty
footballCSKA Moscow 2 Manchester City 2: Premier League champions let two goal lead slip in Russia
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

Helpdesk Analyst

£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...

Day In a Page

Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
Ed Sheeran hits back after being labelled too boring to headline festivals

'You need me, I don’t need you'

Ed Sheeran hits back after being labelled too boring to headline festivals
How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

How to Get Away with Murder

Shonda Rhimes reinvents the legal drama
A cup of tea is every worker's right

Hard to swallow

Three hospitals in Leicester have banned their staff from drinking tea and coffee in public areas. Christopher Hirst explains why he thinks that a cuppa is every worker's right
Which animals are nearly extinct?

Which animals are nearly extinct?

Conservationists in Kenya are in mourning after the death of a white northern rhino, which has left the species with a single male. These are the other species on the brink
12 best children's shoes

Perfect for leaf-kicking: 12 best children's shoes

Find footwear perfect to keep kids' feet protected this autumn
Anderlecht vs Arsenal: Gunners' ray of light Aaron Ramsey shines again

Arsenal’s ray of light ready to shine again

Aaron Ramsey’s injury record has prompted a club investigation. For now, the midfielder is just happy to be fit to face Anderlecht in the Champions League
Comment: David Moyes' show of sensitivity thrown back in his face by former Manchester United manager Sir Alex Ferguson

Moyes’ show of sensitivity thrown back in his face... by Ferguson

Manchester United legend tramples on successor who resisted criticising his inheritance
Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

Lonely Planet’s Best in Travel 2015

UK city beats Vienna, Paris and New York to be ranked seventh in world’s best tourist destinations - but it's not London