How can I be so confident about this? Just before 10am on Thursday the Bank announced a repurchase agreement in the money markets, which offered fixed rate assistance until the next monthly monetary meeting on 26 September. Short of Eddie George making an announcement by loudhailer from the middle of Threadneedle Street, no more conspicuous statement of unchanged policy could have been made.
Furthermore, since the 26 September meeting will immediately precede the party conferences, it is most unlikely that base rates will change then. That takes us up to early November. One might have thought it of passing interest to the British people that their rates were almost certain to remain unchanged for at least a couple of months, yet there was virtually no reporting of this key decision before the weekend.
Obviously the average newshound has not yet even begun to adjust to the modus operandi of the new monetary arrangements, under which base rate changes will normally only happen in the day or two following the monthly monetary meeting. Although I said last week that the Bank of England is not in vaudeville, there is perhaps a case for following the example of the Bundesbank and (nowadays) the Federal Reserve, both of which issue statements in plain language after their main policy meetings.
I am reminded of the story - which I hope is not apocryphal - that the Sea Lords used to send messages to the fleet by a system of pulleys and wires which started at the Admiralty in Whitehall and ended up moving semaphore flags in Portsmouth. The Bank of England's signalling methods are not quite as outmoded, but in the new 'transparent' monetary system a simple statement might let the public into the rather important secret that was shared on Thursday only by the money markets.
By the time they meet to set base rates in November, the authorities will have a good idea of what might be in the Budget. So far there has been barely a ripple on the Budget pond this year, but I would speculate that there are some turbulent currents flowing under the surface. In fact there were press stories last week claiming that the Prime Minister and Chancellor are seriously at odds over Budget strategy.
If these are to be believed the Prime Minister is in favour of tax cuts this year, taking advantage of the recent sharp fall in government borrowing and providing some political cover for the base rate increases that seem inevitable soon.
Meanwhile, the Chancellor is reported to favour another large assault on government borrowing, perhaps with the intention of using this budgetary tightening to minimise the need for base rate rises.
If this is indeed the nature of the debate, I hope the Chancellor wins. It is not yet time to consider reversing one penny of the tax increases that were pre- announced in 1993.
In his first Budget, Mr Clarke claimed that he was going to solve the problem of government borrowing 'once and for all'. The acid test of this was not whether the PSBR could be eliminated in one or two years - it plainly could not, since the effects of the recession on tax and spending would still be lingering - but whether government borrowing could be put on a sustainable footing by the time the economy moved back to normal working.
'Sustainable' in this context means that the ratio of public debt to GDP would thereafter be broadly stable. By coincidence, this would also ensure that the PSBR each year would be no greater than government investment, so the Government would only be borrowing to add to its capital stock. To achieve these targets the PSBR would need to be reduced to about pounds 20bn a year (2.5 per cent of GDP), compared with the outturn last year of pounds 46bn.
The Green Budget prepared by the Institute of Fiscal Studies and Goldman Sachs last October calculated that if the economy grew at 3 per cent per annum over the medium term it would return to normal capacity working by 1997-98. It further calculated that on unchanged policy the PSBR would drop to about 3.5 per cent of GDP in that year, roughly 1 per cent of GDP higher than implied by the above target.
Perhaps by coincidence, this was precisely the amount by which the Chancellor raised taxes last November, so it seemed - within the huge margins of error that are inevitable in calculations of this sort - that his Budget had indeed set government borrowing on a sustainable path.
Since then, the PSBR has fallen much more sharply than expected. By 1997-98, it now seems that it could be as low as pounds 7bn, well below the pounds 20bn target suggested above. Virtually the whole of this improvement stems from the fact that public expenditure is coming in much lower than expected. Even this year it seems that the spending total may be pounds 5bn lower than planned in the Budget.
It is therefore not surprising that we are beginning to hear mutterings that last year's tax increases were unnecessary. But before jumping to this conclusion we need to ask exactly why public spending is dropping so far below target. Has the Treasury found some new way of squeezing the departmental pips without us hearing them squeak?
Well, actually no. All that has happened is that the excellent performance of the economy this year has automatically cut the level of public spending. The November 1993 Budget assumed that unemployment would stick at 2.85 million until 1998, whereas it now looks as though it may fall to below 2 million. Furthermore, the continuing drop in inflation means that the price level will be at least 2 per cent lower than expected at the start of the next fiscal year, so everything the Government buys will be cheaper than anticipated.
The key point, though, is that these happy events should not be used as an excuse to cut taxes, as they were in the late 1980s with disastrous results. In those years Chancellor Lawson fell into the trap of cutting taxes more and more as economic growth speeded up. We must not do anything so perverse again, even if the Budget moves back into surplus as the recovery continues.
With real GDP now growing much more sharply than expected the economy will not return to normal capacity working in 1997-98, as was estimated last year, but will arrive there as early as 1995-96. And what will the PSBR be in that year? Around pounds 21bn, almost exactly the target outlined above. By 1997-98 the PSBR will be well below this limit - but so it should be, since the economy will be working substantially above its mid-cycle level.
All this assumes that the Chancellor leaves the real level of public spending unchanged from previous plans and cuts overall spending by about the pounds 5bn he saves through lower inflation. If he does more, and actually reduces the real level of spending, then - and only then - can he consider either making tax reductions or postponing the base rate rise beyond November.
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