Confusion over economic policy grows

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Confusion over economic policy increased yesterday when Kenneth Clarke, the Home Secretary, said the Government had a duty to stabilise the sinking pound - but that it would probably continue to 'steady down' for a week or two yet.

With no promise of an early, definitive statement from Norman Lamont, the Chancellor of the Exchequer, on an alternative economic policy to the fixed parity of the exchange rate mechanism (ERM), the conflicting views of Cabinet colleagues could yet add to continuing pressure on the pound during the Conservative Party Conference in Brighton, which starts tomorrow.

A continuing slide in the pound could also exacerbate Tory tensions at a time when the party's old guard are at each other's throats over the ERM, and when John Major's personal ratings have slumped.

The situation will not be helped by yesterday's confused pre-conference messages.

Mr Clarke told BBC 1's On the Record: 'When you have a floating exchange rate, it particularly becomes your duty to have a monetary and fiscal policy that gives your traders some stability; that stops the pound sinking in such a way as to create inflation in a year or two's time. . .we must rapidly restore, in the present uncertainty, stability.'

He added: 'We certainly don't want a great deal more devaluation, which will be very damaging to our position.'

The day's confusions did not end there. While the Prime Minister last week refused to rule out early tax increases, Mr Clarke said 'there's no need for tax increases' if public spending was reduced, as expected, to the targets set last July. While the Prime Minister has pledged himself to the target of zero inflation, Michael Heseltine, President of the Board of Trade, said that was 'almost certainly beyond attainment'.

Mr Clarke said the floating pound could mean interest rates going up. Mr Heseltine said it was 'very important' to keep them coming down; and while ministers have been careful not to give a timescale for re- entry into the ERM, both Mr Major and Mr Clarke yesterday mooted the possibility that the terms might never be right.

Even the Home Secretary, an enthusiast for managed exchange rates, said: 'When we go back . . . when and if we do.' That point was echoed by Mr Major in a Sunday Express interview, when he said there was no prospect of going back into an unreformed mechanism. 'If there were to be a reformed ERM at some point in the future, that would be a different matter.'

But he also said: 'It is not good news that the exchange rate is now weaker than it was. This means that we have a less satisfactory counter-inflation policy than we used to have.' In turn, that meant a tough public spending round, and he added: 'The belief that coming out of the exchange rate mechanism and having a floating pound means cakes and honey all round and an easy future is simply not justified.'

That point was underlined by Mr Heseltine, who told London Weekend Television's Walden programme that while the devaluation opened up an opportunity for cheaper exports, it risked imported inflation. As for public spending, Mr Clarke said that ministers were sticking to the pounds 244.5bn planning target for 1993-94.

Mr Major's sinking ratings were indicated by the latest opinion polls.

Mori in the Sunday Times put the proportion of people satisfied with his performance down from 47 per cent to 33 per cent since last month; even a quarter of Tory supporters were unhappy with his performance - up from 12 per cent to 26 per cent in a month.

But Mr Major said it was no good blaming bad luck for his current problems, adding: 'It adds a little spice to an otherwise mundane existence.'

'So now we know,' Gordon Brown, the shadow Chancellor, said. 'Three million unemployed, a humiliating sterling crisis, massive business failures, all add a little spice to the Prime Minister's otherwise dull life.

'For Norman Lamont all of this is a price well worth paying. For John Major it brings a little colour to his grey life. What a heartless admission.'