Clarke fights to keep hand on the tiller

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The Independent Online
Only the none-too-distant noise of knives being sharpened will disturb Kenneth Clarke today as he stands up at the Conservative Party conference to stake his claim to being the best Chancellor for a generation. Steady growth, low inflation, the lowest mortgage rates for more than 30 years, room for modest tax cuts in November and, what is more, the Government's books can still be made to balance by the turn of the century, according to yesterday's Green Budget from the Institute for Fiscal Studies and Goldman Sachs. He can have it all.

Or can he? Minutes of his meeting with Eddie George a month ago reveal the Governor to be steadily arming himself to argue for an increase in interest rates. Mr George has upgraded his warning from "risks to the inflation target probably on the upside" in June's minutes (when he argued against the last quarter-point cut in base rates) to "significant risk to the inflation target".

The IFS's Green Budget, still by far the best of the curtain-raising tomes traditionally published ahead of the real thing, warns that achieving the Government borrowing targets depends crucially on successful control of public spending. Mr Clarke has conformed with his spending plans for the past three years (no mean feat this), but it becomes much tougher from here on in. Moreover, the Green Budget assumptions on tax receipts rely on growth in GDP staying above the long-term average for the next five years without triggering inflation. You have to be a hopeless optimist to believe either of these two things will happen in practice.

What's more, the Chancellor's success in negotiating these obstacles - and, let's be fair, he has steered well so far - is under unusually intense scrutiny by the financial markets. For this he can thank the Tory equivalent of Labour's loony left in the early 1980s, the disturbingly large group of Conservatives who think the way to win the election is to burn bridges with Europe and slash and burn taxes and spending. Their influence negates the credit the Chancellor gets for his steady hand on the macro-economic tiller. As far as the markets are concerned, Britain has the best performing economy in Europe, but it also contains the greatest political risk, too.