COMMENT: No reasoned argument behind Budget criticism

Has the City's romance with New Labour run its course? The FTSE 100 and gilts are still well above their election-day levels, but the chaps who run our capital markets seem to have concluded that if the Prime Minister is against fox-hunting, then Labour's economic policies have become fair game for attack too. First of all, the Chancellor won't wear black tie for the Lord Mayor's dinner, or drink a scotch during the Budget, and now New Labour is going to kill off our weekend sport as well.

City criticism of the Budget certainly seems more of a case of returning to traditional political allegiances than one of reasoned argument. The standard line in the City is that Gordon Brown's failure to get tough by taxing consumers is to blame for rising interest rates and the strong pound.

There are several holes in this rather flimsy argument. First, as Gavyn Davies of Goldman Sachs, our Monday columnist, has pointed out, it is a standard economist's rule of thumb that it takes a pounds 9bn to pounds 10bn net increase in taxes to do the same work in slowing growth as a 1 percentage point rise in interest rates. Few of the analysts now baying about the Budget were demanding a pounds 10bn tax squeeze two weeks ago.

More important, very few serious economists still think it is possible to fine-tune the business cycle by varying taxes and spending. Compared to monetary policy, fiscal policy is too slow, cumbersome and uncertain in its effects. Altering tax rates over the course of the business cycle also undermines the long-term stability of the economy by making it harder for businesses and consumers to plan. The Government would be committing a far graver mistake if it thought it right to put tuppence on taxes now and take it off again in a year's time. Above all, the reason the Bank of England is absolutely right to be increasing interest rates now, despite the dilemma posed by the strong pound, is that the last Chancellor did not do enough in the run-up to the election. He turned down the Bank's advice for the five months before 1 May, and it is now clear that he was wrong.

A combination of higher borrowing costs and an overvalued exchange rate will slow down growth, perhaps quite sharply, and nobody is going to enjoy that very much. But the touchpaper on this boom was lighted months ago and a bit of a bust is inevitable. There is nothing either the Chancellor or the Bank can do about it now apart from sticking to the very welcome new framework for setting long-term macroeconomic policies