Gordon Brown gave tacit approval for further rises in interest rates yesterday and appeared to rule out any new tax rises or spending cuts, insisting that the Government would meet its fiscal rules.
The Chancellor defended the Monetary Policy Committee in the face of criticism that last week's rate rise had been premature, saying the British economy was strengthening.
"The Bank of England, determined to keep inflation low and stable in a strengthening economy, have raised interest rates to ensure that Britain continues to enjoy stable growth," he said in a keynote speech to delegates at the CBI's annual conference.
"I believe the MPC is right to take the forward-looking approach of pre-emptive action, taken as the economy strengthens, to lock in stability."
Although the decision to raise rates, for the first time in almost four years, to 3.75 per cent had been expected it was criticised over the weekend by the Item Club, an independent forecaster, as "premature".
Mr Brown declined to reveal details of 10 December's pre-Budget report but attempted to reassure business leaders that it would not herald any tax rises to tackle a mounting budget deficit. "It is where there is no credible long-term commitment to fiscal stability over the cycle that economies can find themselves in the perverse position of cutting spending or raising taxes at the wrong time of the economy cycle," he said.
"At all times we will meet our fiscal rules and, more than that, in the PBR we will publish our fiscal plans showing that our fiscal position is sustainable over not just a year or two but over the next decades."
The Chancellor was challenged by delegates over the state of company pension schemes and his decision in 1997 to abolish the pensions tax credit rebate at a cost of £5bn a year. "Can we have our £5bn back?" asked Stephen Quest, a tax partner at the accountants Grant Thornton. But Mr Brown insisted the weakness of pension schemes was due to the stock market crash. "This was part of a process over the previous 10 years to change the basis on which we tax dividends and, at the same time, we cut corporation tax by 3p so it has not yielded money to the Treasury," he said.
He pleased the audience by insisting he would use the next meeting of European finance ministers to resist calls for tax harmonisation and the introduction of "inflexible barriers" into the working time, agency workers, investment services and transparency directives.
His comments came as official data showed inflation had fallen to its lowest level this year, calming fears the Bank will hit home owners and businesses with a pre-Christmas rate rise. The annual rate the Bank targets unexpectedly slowed to 2.7 per cent in October from 2.8 per cent. It was driven by a slowdown in service sector inflation which, at 4 per cent, is at its lowest for seven years.
John Butler, an economist with HSBC, said: "The fact the drop in inflation reflects an easing in underlying inflationary pressure rather than simply a slowdown in house prices should reduce ... the apparent urgency to hike rates."Reuse content