Economics: Why Mr Clarke is an accident set to happen

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The Independent Online
BUDGETS, like novels, express the character of their authors. Given the Chancellor's interests, it is unlikely that he will be swamping us with detailed measures of tax reform next month. The Budget will be broad brush, and it may well be bold. After all, he will want to announce his arrival at the heart of government. There is no political pay- off in standing up and merely saying: 'Norman Lamont got it right. There will be no change.'

Political rather than economic considerations will be uppermost in his mind. Mr Clarke has been quoted as telling his officials that he is first and foremost a member of Cabinet, secondly the member of parliament for Rushcliffe and only thirdly Chancellor of the Exchequer. He certainly wears the economics tuition of his chief economic adviser, Alan Budd, rather too lightly for my taste.

I was particularly struck by the contrast between the Chancellor's engagement and interest in the proceedings of the different committees during the annual meetings of the International Monetary Fund and the World Bank. The Chancellor emerged from the development committee to talk with evident authority about the Trinidad debt relief terms, Uganda and Bangladesh, where he spent a recent Christmas. As a fellow devotee of these issues, I can testify that he was genuinely enthusiastic.

When I returned to London, I discovered that Mr Clarke's wife, Gillian, has been a trustee of Oxfam for 14 of the last 16 years, and ran an Oxfam shop in the constituency for a decade. I would put a side bet, in this spending round, on the Overseas Development Administration's budget being relatively secure. By the end of the Chancellor's Washington briefing, Tim Lankester, the ODA's permanent secretary, was visibly glowing.

By contrast, the Chancellor leftthe meeting of the Group of Seven industrial countries' finance ministers and the powerful interim committee looking as thoroughly disengaged as a slipping clutch. He did not have a grip on all the issues and looked as if he did not much care to get one. Mr Clarke is also the first Chancellor in many moons to rely wholly on official economic advice, rather than to appoint his own economist as a special adviser who can tell him when the mandarins are blinding him with science.

This boredom with the mainstream work of the Treasury is, of course, utterly inexplicable to commentators and Treasury officials who consider it the most intellectually fascinating part of public policy. As one official told me, this is the first Chancellor in living memory who does not care what the veteran Financial Times commentator Sir Samuel Brittan writes. (This is apparently not strictly accurate, as the Chancellor has written to Sir Samuel, but this was on a political matter and the poetic truth holds.)

In time, this lack of interest combined with the Chancellor's willingness to give a soundbite to any waiting camera crew may well be his (and sterling's) downfall. So far, Mr Clarke has displayed a Teflon-coated ability to shrug off his economic infelicities, in part because of his love affair with the lobby correspondents. But he had better watch out. Chancellors who fail to develop an eye and an ear for their market audience as well as their political one often come a cropper. On present performance, Mr Clarke is an accident waiting to happen.

Mr Clarke's political instincts have been much in evidence during the public spending round. The Chancellor has toutedfor our sympathy with his difficulties in controlling public spending, which is frankly absurd when the recent real rise (after allowing for inflation) has been 9.7 per cent in two years and when expenditure takes 45 per cent of national income. People who have known him for many years suggest that his instincts are essentially those of the taxer and spender.

No sensible person wants to pay taxes unnecessarily, so I hope I am wrong about this and that the row at the end of the last week about defence spending is an augury of cuts. There is no reason for us to spend more on defence as a share of national income than other European nations, although this is still planned to be the case even after the cuts.

We have utterly failed to conduct a comprehensive defence review since the final collapse of the Soviet Union and are set to keep more troops in Germany than the Russians. We have a Navy big enough to help defend Atlantic convoy routes against a non-existent threat, and we have an air force big enough to give them cover. We also pay for a defence bureaucracy larger than the standing army. And we are about to spend billions on a new missile, presumably aimed at the French.

This is all potty, but it may be that the defence cuts are earmarked merely to make room for Mr Clarke's priorities of education and health. If Mr Clarke is protecting overall public spending for political reasons, I also suspect that he may well raise taxes largely for political rather than economic reasons.

That may sound unlikely in a party apparently dedicated to low taxation, but a tax increase would allow the Chancellor to show that he is capable of taking tough and apparently unpopular decisions. He has his eye on the job next door, as he has repeatedly confessed. If he is to advance his standing with his own party, a small tax rise in the cause of sound money would be no bad thing. Taxes also appeal to British puritans, who believe themselves virtuous when they are merely uncomfortable.

The Bank of England's budget advice, which I reported in the Independent on Wednesday, suggests a tax rise of 1 per cent of national income - about pounds 7bn - spread over three years, with up to half next month. This is not testament to the machismo of Eddie George, the new Governor. Indeed, Mr George appears to be one of the Bank's doves on the budget deficit. In the eyes of the hawks, a lifetime of public service may have made him more amenable to political realities than a thoroughly modern central banker should be.

This is not my view. Mr George's proposal is well-judged. It would bring the total rise in taxes, after adding Mr Lamont's increases, to some 1.5 per cent of national income next year. This is a large rise for an economic recovery that is still struggling, but the case for postponing it is nevertheless a weak one, despite last week's disappointing figures for manufacturing output. Indeed, depressed European markets are all the more reason to give our traders a greater incentive to deliver an export and investment-led recovery.

The two things that could help manufacturers most in the short term are a further reduction in interest rates to reduce the cost of financing stocks and investment, and a further and temporary drop in sterling to offset the impact of weak markets. British interest rates are just 0.75 percentage points below German ones, far less than the 2.2 percentage point gap that ruled in February when the exchange rate was lower as a result. With sterling up more than 4.5 per cent since the February average, the Chancellor can certainly afford a one-point or a 1.5- point cut in interest rates while we wait for the Bundesbank's interest rates to catch up again.

Meanwhile, consumers seem to be chugging along more merrily than their high debts give us any right to expect. Retail sales volume was up 3.8 per cent in the year to August, perhaps boosted by consumers trading down to the high-street goods contained in the index, and away from the restaurant meals and other items included in the wider measure of consumer spending, which grew by 1.9 per cent over the year to the second quarter. That is solid enough growth to risk some budget tightening, as the quid pro quo for lower interest rates and a more sustainable pattern of growth. I will return to specific measures another week, but my favourite is the abolition of mortgage tax relief, simply because there is likely to be no more appropriate or painless time to do it than when interest rates are falling. Abolition is also preferable to VAT rises, because it would not boost inflation.

And consumers have tosuffer something. This is, after all, the recovery where we have to work harder and longer and produce more, just to send the fruits overseas so that we can gradually close the gap between imports and exports. We had the good times in the 1980s. In the 1990s, we must pay our penance with a hairshirt recovery.