Kenneth Clarke 1, Treasury 1: Bill Robinson, former special adviser to Norman Lamont, assesses the first battle for the mind of the new Chancellor

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The Independent Online
FEUDAL Britain was ruled by the king and his barons. Contemporary Britain is governed by ministers running great departments of state. The interesting feature of these modern baronies is that the tenure of each baron is so short that enormous influence resides with the officials who advise him. When a minister is learning a new brief, he has little time or energy to question it.

But Kenneth Clarke is a political heavyweight, a man of great self-confidence. He will want to put his personal stamp on his new department. So the 'Mansion House' speech on Tuesday was eagerly awaited as the outcome of the first battle for the mind of Mr Clarke. Would it be an old-style dissertation on monetary policy, written in mandarin? Or would it be a more political document, written in new-speak?

It is tempting to say that we got the old ideas and policies dressed up in some new rhetoric, but that would not be quite true. Viewed as the result of a tussle between Mr Clarke's instincts and the Treasury's advice, I would rate it a score draw.

It was a good speech and a polished performance. Mr Clarke came across as a bloke who would like to cut taxes but really won't be able to unless something is done about spending first.

You could say that was a victory for the Treasury. The inflation target remains in place. The public finances are to be brought back into balance over the medium term. And the recovery is to be sustained.

This is exactly the policy mix that was thrashed out last autumn between the Prime Minister and his then Chancellor in the aftermath of Black Wednesday.

The Prime Minister had promised a new policy for growth. Norman Lamont was determined to take no risks with inflation. Growth was taken care of by interest rate cuts, and a package of measures to boost confidence which included new money for housing and the abolition of car tax. Inflation was looked after by the adoption of a new inflation target, buttressed by ranges for the money supply monitored on a monthly basis, and all subject to a quasi-independent new quarterly assessment from the Bank of England.

It now looks as though the policy has worked. Headline inflation has fallen to little more than 1 per cent. And after bumping along the bottom for a year, the economy has clearly turned up - although the hesitancy of the US recovery stands as a warning of doubts and setbacks to come. The still-deepening recession in Europe will also hold us back.

The upturn is widely attributed to the easing of monetary policy after Black Wednesday. This has an interesting political consequence. The Government is blamed for the recession, because it was due to the high interest rates needed to keep us in the exchange rate mechanism. The Government gets no credit for the recovery, because it is all put down to the interest rate cuts made possible by the forced exit from ERM. Lower interest rates, though welcome, are thus regarded as part of that policy failure. The Government is still accused of inaction and complacency in the face of recession. There are still calls for a further fiscal boost.

The truly extraordinary thing is how few people recognise that the Government is already presiding over a very large fiscal boost. Public spending this year will be at least pounds 42bn higher than two years ago. Over the same period, recession-affected public revenues rose by only pounds 7bn. That is why the budget deficit has soared from pounds 14bn to pounds 50bn.

The Government gets no credit for this. One reason is that so little of the extra spending comes from new political initiatives. The biggest single item is a recession-induced pounds 10bn increase in the social security bill, which is hardly something to boast about.

The other problem is that the Government wants to convey an impression of fiscal rectitude to two audiences: to foreigners, so that they go on lending us the money; and to the dissidents on the right of the party, so they go on voting for it.

This means that the Government can say nothing about how much it is spending and how that is helping Britain's recovery along. Instead it has to voice its concern about public finances. All the talk is of the need to stick to the very tight public spending figures that were agreed in Cabinet last July. So we are back in the familiar unreal world of spending 'cuts' that aren't cuts at all, with the Treasury running hard just to stay in the same place.

It looks as though the new Chancellor, who arrived in office sceptical of the need for such cuts, has been persuaded by his officials. The order in which he lists his policy priorities is a) controlling inflation; b) restoring public finances to balance; both ahead of c) sustaining the recovery. That is orthodox Treasury old-speak. So does this mean we are simply going to get the old policies, more engagingly presented?

Not necessarily. Before he came to the objectives of policy, Mr Clarke included in the speech an interesting passage in new-speak, obviously not drafted by his officials, in which he clearly sought to present himself as the champion of the Midlands manufacturer. And that was just the latest in a series of signals. Consider.

Mr Lamont, a former merchant banker who sits for a London constituency, is replaced as Chancellor by Mr Clarke, the son of a Nottingham miner, with a seat in the industrial Midlands. In his first major speech, Mr Clarke says: 'I stand before you not as a Londoner: my whole life has been spent in the industrial Midlands where I have acquired a deep and abiding respect for all those engaged in commerce.'

In the same week Mr Clarke gets rid of the one remaining political adviser inherited from the Lamont era in order to make room for an industrialist. We now have a Government run by a Prime Minister who remarked last week that perhaps we had gone too far in the direction of laissez faire. We have an Industry Secretary who said at the Conservative Party conference that he would intervene before breakfast, lunch and dinner to help industry. Three of the most powerful men in the Cabinet all have interventionist instincts, and they will not be opposed by the Foreign Secretary.

There is nothing wrong with making sympathetic noises to encourage industry, but a return to the bad old ways of state aid, picking winners, etc, will be bitterly resisted in the Treasury and on the right of the Conservative Party.

The implications of the new pro-industry stance for exchange rate policy may also become a battleground in the months ahead. The first battle for the mind of Mr Clarke is over, but the war will go on.

(Photograph omitted)