Next Budget may see new inflation targets

Jeremy Warner looks at the economic view in Davos
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New inflation targets to extend beyond the life of this parliament are likely to be announced in the next Budget, Kenneth Clarke, Chancellor of the Exchequer, indicated yesterday.

At the same time he dampened fears of an immediate rise in interest rates by giving a "very cautious assessment" of whether it would be possible to sustain present growth of 4 per cent a year or "a little less".

"I would be careful in forecasting that we can sustain growth at a faster rate than we have in the past," he said.

Mr Clarke indicated that the Treasury would be reviewing what measurement of inflation to use in new targets as well as the headline range. The present target range of 1-4 per cent is based on the retail price index. Alternative measures could be looked at.

The Chancellor explained that the cut-off point for the present targets was early 1997. "Now is the time to start thinking about what to set beyond 1997," he said at the World Economic Forum in Davos.

Britain would again be the fastest-growing economy in the European Union this year. Whether it was 4 per cent or "a little less" remained to be seen. The official Treasury forecast is for 3.25 per cent growth.

"My ambition remains to sustain a good level of growth for some years now through the 1990s," Mr Clarke said.

His position was that the Government was still discovering what level of growth could be sustained without causing inflationary pressures.

Strong growth was a potential warning indicator of inflationary trouble, but it was only one of a number that the Government was taking into account.

The Chancellor said he believed that financial markets now viewed the UK economy in the same way as Germany's. There was renewed confidence in Britain's ability to achieve sustained, low-inflation growth, making it largely immune to the currency buffeting that had afflicted European partners.

Earlier Mr Clarke insisted that the gyrations in interest rates and currencies caused by the freeing up of capital markets need not threaten prosperity. "Often they reflect legitimate concerns about economic policy, such as excessively high levels of budget deficits.

"The benefits of liberalised capital markets far outweigh the costs."

Mr Clarke told his largely Continental audience that deregulation of the labour market should be a policy priority.

"Unlike capital and product markets, labour markets in most European countries remain highly regulated. These arrangements are motivated by an understandable desire to promote social welfare, but they have not worked. Excessive and unnecessary regulationof hiring and firing and pay and conditions is a serious deterrent to new job creation. The unemployment figures in most western European countries prove it."