A growth policy will need a new Chancellor

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The Independent Online
I PLAYED no part in drafting the Independent's 10-point plan to save Britain from slump. Nevertheless, I agree with the policies put forward and fully share the sense of urgency.

I would put reservations against only two of the 10 points. The return to the exchange rate mechanism seems to me a phantom possibility, akin to the possible return to the gold standard after 1931. It will not happen, but the expectation of it could lead to the undue caution against which the Independent warns.

Those who remember the creation of the Department of Economic Affairs under George Brown in 1964 will probably have reservations about the conflicts likely to follow the creation of a Department of the Economy. The Treasury has many faults, and has made very bad mistakes, but it would fight any other economic departments, as traditionally it fought the DEA or even the Board of Trade.

With these two exceptions I agree with the whole policy. I certainly share the view that debt is the key issue, and particularly mortgage debt.

Unless interest rates are brought down much further and the proportion of income required to service debt is brought back to a normal level, the depression in Britain will deepen. There will certainly be no recovery, and unemployment will continue to rise rapidly.

The belief that has previously restrained the Government from acting decisively is that this is an ordinary 10-year recession, like those of 1973 or 1981. The evidence is that it is a major debt deflation crisis, more like the 1930s, the 1870s or the 1820s. It is world-wide, long lasting and severe. In an ordinary recession, governments rightly fear over-reaction; a depression is a different matter and has to be fought in a different way.

The eight points that I would strongly endorse are a cut in interest rates to 5 per cent; major road and rail projects; help to the housing markets; new finance for small businesses; an independent Bank of England; budget balance over the economic cycle; independent economic forecasting; strong commitment to free trade and to Gatt.

They comprise a programme for growth and the reduction of unemployment, with provision to avoid future inflation when the economy recovers. They offer the Prime Minister a draft of the growth policy to which he committed himself last week.

There are, however, real political and economic obstacles to be overcome. The new policy will succeed only if it restores business confidence. A reconstruction of the Government seems inevitable. It could even happen in the hours before this article is published.

The Government has been damaged by the recession, by the forced withdrawal from the ERM and by the mishandling of the coal-mine closure proposals. The Prime Minister has the lowest approval rating since polls began; most people think the Chancellor should go; Michael Heseltine is probably not as damaged as many people think, but is certainly weaker than he was.

The other two of the famous five, Douglas Hurd and Kenneth Clarke, are less weakened but share inner Cabinet responsibility for the general failure of policy.

One proposal is that Kenneth Clarke and Norman Lamont should simply shift places - Mr Lamont to the Home Office and Mr Clarke to the Exchequer. That would be a mistake. It would leave the inner five unchanged, and would do nothing to broaden the Cabinet. In any case, Kenneth Clarke is not the best man to create confidence as a Chancellor. He is too left wing and too zealously pro-Maastricht to have the support of the right wing of the Conservative Party in Parliament.

On television and in the House of Commons he is the party's best brawler in debate: tough, agile and brazen. Those are valuable political qualities - Norman Tebbit filled much the same role for Margaret Thatcher - but they are not the qualities that create confidence in financial markets.

Everyone knows that Kenneth Clarke uses arguments like clubs to beat his opponents, and anyone can see that he will pick up any club that lies to hand, without stopping to test its validity. That is not how a Chancellor should behave if he wishes to be believed.

What a Chancellor needs is intelligence and experience. John MacGregor is possible. Peter Lilley certainly has both but might be unacceptable to the Europeanist, and indeed to the anti-Thatcherite, wings of the party. Malcolm Rifkind is one of the most intelligent members of the Cabinet, and has ministerial experience of Scotland's economic problems.

Peter Brooke has been in the Treasury, and had a successful career in business consultancy before he entered politics. Now that the United States looks like having its first Oxford-educated president, Britain could reciprocate by having a Master of Business Administration from Harvard as Chancellor.

The financial and economic problems are much greater. Professor Tim Congdon, whose record in the past seven years has been so much better than official forecasters', points to the balance sheet weakness of our financial institutions in the latest issue of Gerrard & National's Monthly Economic Review.

He concludes that credit growth will be limited because banks have been unable to rebuild their capital-asset ratios. They still face record insolvencies, both of personal and business clients. The banks are 'frit', as Margaret Thatcher used to say; they are also 'skint'.

The fall in the housing market has been bad enough; the fall in commercial property has been even worse. Upward-only leases preserve rents that are often double or more-than-double the market rent for shops and offices. Obviously most such leases have zero value.

The housing market in many parts of the country continues to fall. Building societies are therefore unable to rebuild their assets, and mortgage arrears are continuing to rise. The general insurance companies are suffering heavy losses on their mortgage indemnity business. The fall in the housing market and the collapse of parts of the commercial property market put severe pressure on the balance sheets of banks, building societies and insurance companies. This will continue to constrict lending. Low growth in lending will defer recovery.

Apart from this, the international trade outlook remains dismal. In 1993 the United States may well go into the third dip of its recession. Japan is still trying to stabilise a collapse of asset values. Europe is going into recession, particularly in Germany and France. Italy is on the verge of financial collapse. Britain is a depressed economy in a depressed world.

Until last month the Government's central policy was membership of the ERM. Until last week the Government had no commitment to growth as the priority. These conversions to reality came far too late, and the delay has inevitably damaged the Government's standing. A growth policy, such as the one the Independent advocates, is now generally accepted as necessary.

The development and implementation of such a growth policy, while restoring international confidence, will be extremely difficult. Without being too hard on Norman Lamont, it plainly does require a new Chancellor. The new Chancellor must be of the highest available quality, a man of character and sober words, a man of experience, a man of intellect. The inner group must in any case be changed and enlarged. A new policy needs new thinking and new people.