At Mansion House last week, Kenneth Clarke was eager to show his City audience - who have a keen sense of morality in such matters - that he remains on the side of the angels. He promised to cut taxes, 'but only when we can afford to do so and not before we can afford to do so'.
This show of virtue was appropriate in a week in which the devil found some influential allies to press his case. No sooner had the aggrieved voters of Bedfordshire and Milton Keynes spurned the advances of Edwina Currie, than Sir Norman Fowler was predicting that the Conservatives would soon be able to restore their reputation as a tax-cutting party.
If Sir Norman had merely been reflecting the views of a few neurotic backbenchers, Mr Clarke could have dismissed the calls for tax cuts as short-lived panic at the sound of gunfire. But what really rattles the Treasury is the growing number of senior ministers who privately believe that the Government may have no other choice than to buy itself out of trouble.
The Chancellor's battle in the cause of fiscal prudence will not be helped by what he described at Mansion House as 'the most important decision I have made in monetary policy so far': the publication of the minutes of his monthly meetings to discuss interest rates with the Governor of the Bank of England. With the financial markets prepared to punish severely any signs of disagreement, the Government has pushed the Bank well down the road towards independent control over interest rates - with all the potentially disastrous consequences that implies.
Giving the Bank of England greater power over interest rates is an accident waiting to happen. It threatens a serious imbalance in the way in which the weapons of economic policy are combined.
The Bank will ensure that interest rates are set to pursue low inflation, while the Government will set taxes and public spending to pursue growth, employment and votes. Each policy maker will try to offset the actions of the other, producing a combination of explosive Government borrowing and high base rates - exactly the policy mix Britain does not need.
Advocates of independence argue that this need not happen if the Bank threatens in advance to respond to fiscal profligacy by raising interest rates. But the recent path of government borrowing in Germany and the US, both of which let their central banks set interest rates free of Treasury interference, does not inspire much confidence. The tide may now be turning against central bank independence in both these countries; as with the European exchange rate mechanism, our Government may be leaping on to the bandwagon just as its wheels fall off.
The Chancellor and the Governor argue that it is already impossible for ministers in Britain to manipulate interest rates for short- term political gain, but history shows that governments here have always been more inclined to bribe their electorates with rises in public spending and cuts in taxes than with cheaper mortgages. Remember the spending spree over which John Major presided in the run-up to the last election: money was found for everything from ground- to-air missile systems to protection schemes for the red squirrel.
Giving the Bank more muscle will only make things worse. Pressure on the Government to cut taxes or raise spending will be all the greater now that the Bank can, in effect, force higher base rates on the Treasury - an act of monetary machismo which, unless taken to extremes, would almost certainly advance its campaign for total independence. The Governor, Eddie George, seemed almost to be relishing the prospect when he said at Mansion House that a rise in interest rates was inevitable.
But Mr Clarke protested that he was as committed to low inflation as the next man, who in this case happened to be Mr George. The self-styled 'political Chancellor' declared that an inflationary boom would be bad politics: 'A little more inflation will not make savers, workers or home owners feel good for very long. A fraudulent, inflationary 'feel good' would soon turn to 'feel very bad' as the bust followed the boom.'
How often have we heard this before? The problem is that an inflationary cut in taxes or boost to public spending might just make savers, workers and home owners feel good for long enough for the Tories to win the next election. And if the Tories lose, Labour will get landed with the bill.
A pick-up in inflation would be popular in the short term. It would lift hundreds of thousands of floating voters out of negative equity and erode the burden of consumers' debt. And for some reason people are happier to receive a 5 per cent pay rise that is offset by rising prices than for their pay never to change but to remain unmolested by inflation. So it would be some time before the pain of rising inflation became unbearable.
But for now inflation is low, which may help to intensify the pressure for tax cuts as government borrowing falls more quickly than the Chancellor forecast in last year's November Budget.
Mark Reckless, at Warburg Securities, calculates that the Treasury may find itself with pounds 6bn of unexpected leeway in the next financial year. Inflation this year is likely to come in a full percentage point below last November's Budget forecast, which means that the Government will be able to buy the same goods and services for less cash. It could also save pounds 600m from the benefits that are uprated in line with rising prices. Unexpectedly rapid falls in unemployment should save around pounds 800m as fewer people claim benefits.
Privatisation proceeds also appear to be running ahead of the Treasury's plans, perhaps providing an extra pounds 1.3bn this year and next. The combination of an unexpectedly strong recovery and buoyant consumer spending - offset in part by subdued inflation - could also boost tax revenue pounds 1bn to pounds 2bn above current projections in the next financial year. In addition, the Treasury has already managed to undershoot last year's departmental spending targets by pounds 1.8bn.
The ultimate test of Mr Clarke's Chancellorship will be the way he uses this room for manoeuvre. He has three options: to raise spending, to cut taxes, or to reduce Government borrowing. The angels will be urging him to take the third option, and the signs so far are hopeful. It looks as though the first savings from Michael Portillo's 'fundamental reviews' will appear in this year's spending round, with big cuts in some departmental budgets pencilled in for the next few years.
It is important to remember that even a pounds 6bn cut in next year's expected public sector borrowing requirement would still leave the Government spending pounds 24bn more than it raises in revenue - the public finances are still in a pretty ropey state. As Peter Warburton, at Flemings Research, has pointed out in a hair-raising analysis, the Government is less able to meet its current spending out of its current income than at any time in the past two decades: 'The rot has at last been stopped, but the restitution of a tolerable balance between receipts and spending will be a painful and drawn-out affair,' he said.
The mirror image of the public sector's deficit is the excessive share of national income devoted to consumer spending. Personal consumption accounts for an unprecedented three-quarters of national income, with figures last week showing that retail sales are rising by nearly 4 per cent a year. More resources have to be devoted to exports and investment, so personal and Government consumption both need to be restrained.
Even if public sector borrowing is on course to undershoot current spending forecasts, there is no economic justification for pre-election tax cuts - or even the cancellation of those pre-announced tax increases yet to take effect.
But by the time Mr Clarke or his successor draws up next year's Budget, it will be a miracle if the devil has not taken the upper hand over the angels. On past form, we will then be set fair for another inflationary boom and bust. That may be the price we have to pay for living in a democracy.
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