That is good. But we are also at the moment of maximum danger. The danger is this: in its desperation, the Government will do more than enough to lose the confidence of the markets, but in its timidity may do too little to bring forward the day of Britain's economic recovery. The extent to which reflation can now begin is in direct relationship to the Government's ability to convince the rest of the world that it has no intention of returning to the days of boom and bust.
Because the Government's words have been devalued by events, only deeds will suffice. We therefore put forward a 10-point plan that combines - and it is the combination which is crucial to success - measures to revive the economy with institutional reforms to restore credibility and confidence.
Measures to revive the economy.
1. Cut interest rates immediately to
5 per cent. There is no argument for lowering rates gradually. A series of small reductions would not give the sharp boost to confidence needed, and would do more to undermine the exchange rate than a single large cut that leaves open the possibility that the next move might be upwards. Given the severe debt trap many people find themselves in, there can be no recovery until personal balance sheets have been rebuilt. Five per cent base rates will not kickstart the economy on their own, but they are the essential precondition for recovery to begin.
2. Push ahead with major road and rail projects. Construction and civil engineering have vast unused capacity. It will never be cheaper to build the kind of transport infrastructure Britain needs to take it into the next century as a competitive economy. Short-term concern about the public sector borrowing requirement should not in present circumstances act as a constraint on what are one-off, self-limiting expenditures. The quid pro quo for additional capital investment must be a 2 per cent ceiling on public sector pay.
3. Revive the housing market. More than pounds 80bn has been wiped off the value of the nation's housing stock in the past 12 months alone. Lower mortgage interest will help enormously, but in addition we need (a) a strictly time- limited tax incentive to bring first-time buyers back into the market and (b) a scheme to remove from the market the price-depressing overhang of 70,000 repossessed homes. Consumer confidence cannot return while 15.5 million householders continue to see their wealth drop by an average 7.5 per cent a year.
4. Encourage lending to small businesses. The role the high street banks have played in this recession is well documented. Thousands of good small businesses have been destroyed by the sudden reluctance to continue lending. The banks have always been steered with official guidance. It is time that the Government, however discreetly, made it clear that the closure of sound businesses at the bottom of the recession must cease.
Measures to restore confidence.
5. Make the Bank of England independent. The Bank would have just one statutory purpose: the conduct of monetary policy with the goal of achieving roughly stable prices. Each month it would be obliged to give a detailed report to Parliament (not the Government) on the discharge of its inflation- fighting duty. Taking day-to-day monetary policy out of the hands of discredited politicians would give the markets confidence that interest rates would rise before inflation re-emerged as a threat.
6. Reform the Treasury by giving it a single statutory responsibility: to balance the budget over the course of the economic cycle. Tax increases in the pit of recession should not even be considered, but to give credibility to its balanced budget commitment the Treasury should announce its intention now to raise taxes and charges or curb spending as necessary when the economy is once again growing strongly.
7. A new independent forecasting unit. It should have a board of outside economic advisers and be free to buy its forecasts from the private sector. The Treasury's forecasting record is not only abysmal, it has become at least one of the causes of policy error.
8. Establish a Department of the Economy that would co-ordinate three key supply-side ministries - the Department of Trade and Industry, the Department of Transport and a new Department of Education and Training.
9. Play a central role in Europe. When the economy has regained its strength and when European interest rates have converged we should seek again to link the pound to the currencies of our European partners as a further bulwark against inflation and to realise the maximum advantage from the Single European Market.
10. Make a strong commitment to free trade. The Gatt negotiations are on the verge of successful completion but may be wrecked if France is allowed to exercise its veto within the EC. Without confident and courageous British diplomacy the whole project could founder with the loss of countless millions of jobs across the world.
No 10-point plan is a panacea and Britain cannot be unaffected by a world recession which has yet to run its course. But this combination of policies and changes to our economic institutions will avert the real danger of sliding into slump and will accelerate our emergence from recession. Reflation on its own will fail. Institutional reform on its own would be meaningless. Taken together they would be potent medicine.
Programme for recovery, page 27
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