An independent Bank is Labour's litmus test
Saturday 01 March 1997
What Labour says it will do and what it will actually do when in government are likely to be two very different things. Belief in the new religion is one thing, being a good Christian quite another.
On one level, Labour's refusal to contemplate giving the Bank of England immediate independence in the determination of monetary policy is an entirely practical piece of decision making. To do so would require legislation, and that's going to take a minimum of a year to enact. So even if Mr Brown did not believe the Bank had to "earn" its independence with a period of good behaviour on probation, some kind of transitional arrangement would have to be put in place.
Even so, it is hard not to sense in Mr Brown's manoeuvrings a deeper purpose, for part of the intention of these arrangements is to achieve a situation where all risk of conflict between chancellor and Bank in the determination of policy is removed. Mr Brown calls it "depersonalising" the process but there's actually a bit more to it than getting rid of the media ritual of the Ken and Eddie show. He wants to arrive at a point where the two sides, he and the Bank, are able to agree on policy in nearly all conceivable circumstances.
While this seems a reasonable enough ambition, the effect may well be a rather laxer monetary policy than would otherwise be the case. There is generally compromise and fudge behind the outward appearance of harmony and this setup seems like a formula for just that. In a non-adversarial system, the balance in policy will always be towards the soft option. At this early stage in Britain's attempt to establish credibility as a low-inflation economy, is this really the right approach?
To claim that lax policy is actually Mr Brown's purpose here may be to exaggerate the argument, but this could well be the effect. The Bank will be required to set up a formal monetary policy committee to guide the Governor on his advice, which in turn will be half staffed by seconded outsiders. While technically these people will not be Labour placemen - the Court of the Bank of England will make the appointments - in practice they will be; in the real world the Bank is not going to opt for anyone Mr Brown doesn't approve of. It can be stated with some certainty, for instance, that Patrick Minford will not be on the short list. The chancellor therefore maintains an effective right of veto.
The Bank has managed to win one important concession - that all these appointments will be established experts in the field of monetary policy. The powerful vested interests of organised capital and labour don't automatically get a seat at the table. Even so, it can readily be seen that the effect could easily be to dilute and homogenise the decision-making process.
And just in case the committee is still prone to err on the side of caution, notwithstanding the outsiders, the chancellor is proposing to bolster his position through the appointment of a powerful "council of economists" who will work to him at the Treasury. Should the two sides perchance disagree, there is not much doubt who would have the upper hand.
Some of what Mr Brown proposes seems entirely reasonable, given the traditional suspicion with which financial markets hold Labour governments. Could Mr Brown get away with defying the Bank of England's advice, in the same way as Kenneth Clarke has? Certainly not in his first year or two. The markets would wreak a lasting revenge, even though Mr Brown, like Mr Clarke a couple of years ago, might with the passage of time be proved to have been right all along.
The truth of the matter is that, at best, Mr Brown is going to be regarded by financial markets as an unknown quantity, at worst a Labour chancellor of the old school, quite willing to play fast and loose with the economy if that is the price that has to be paid to advance the party's social priorities. So in that sense Mr Brown is quite justified in setting himself up with a mechanism that allows him to exercise his judgement without having to pay a ghastly penalty for doing so.
But here's the rub. Mr Brown's judgement is all too likely to be of the variety that factors in a whole host of other criteria besides rigid adherence to the inflation target. Maintaining growth is one. Unemployment another. And, very pertinent at the moment, a third might be the exchange rate.
I don't want to overegg the argument here, for in many respects it is hard to fault what Mr Brown is proposing. Quite a bit of what I've been saying might seem unduly cynical and nit picking. But the claim that these arrangements are a significant advance on what went before, an evolutionary leap on the way to full independence for the Bank, is a very questionable one. Stripped of its rhetoric, what's proposed here is merely the old system in new clothing. The decision will remain the chancellor's; the rest is just a way of making those choices seem as credible as possible.
As for the insistence that the Bank needs first to "earn" its independence, the shadow chancellor is surely kidding, isn't he? Responsibility for the disastrous, compromised nature of policy over the past 50 years lies not with the Bank but with successive generations of chancellors. Set against such a record, the Bank's error of judgement in advising on an interest rate hike two years ago when none proved necessary should scarcely register at all. That hasn't stopped it being constantly cited to support the case against independence. Since when has erring on the side of caution been an offence greater than that of recklessness? Yet that is what Mr Brown implies when he talks about the Bank having to earn its independence.
Mr Brown holds out the promise of independence, but will he actually deliver? Having already tied his hands so thoroughly on tax and spend, will he really want to surrender monetary policy as well? If Labour takes us into monetary union, it will have no option. Maastricht demands central bank independence, subservient to the even more distant independence of the European Central Bank. Mr Brown's scope for painting on the broader economic canvas would be more restricted than ever. The issues Mr Brown is grappling with over domestic monetary policy are magnified 10 times over in European monetary union. His failure fully to embrace independence for the Bank of England may be a harbinger of things to come on Europe too.
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