He congratulated himself that it is now virtually impossible for him to tinker with interest rates solely to court political popularity. Eddie George, the Governor of the Bank of England, is standing guard to thwart any such attempts and expose them to the public. As for fiscal policy, Mr Clarke emphasised that there was no manna from heaven that would allow the Government to reduce taxes painlessly.
His speech represented tacit confirmation that the once easy ways of paying for tax cuts are no longer available. The resources that sprang in the Eighties from the oil bonanza, rapid economic growth and large-scale privatisations will not be his. Instead the Chancellor is burdened with a budget deficit that will remain high even several years into the economic upswing. The Chancellor is determined that growth should be steady but unspectacular. Hence, if Tory backbenchers are to get the tax cuts they want, they will have to accept a new rigour in controls on public spending.
Mr Clarke's sentiments are welcome and consistent with a gathering consensus, even in the Labour Party, that maintaining economic stability should be the primary aim of policy. But doubt must remain as to whether the Chancellor will stick to his principles as the general election approaches and nervous Tories flail about for ways to increase their party's popularity. Will he really break with his predecessors and opt for financial prudence over political expedience?
The first test of whether Mr Clarke's actions live up to his rhetoric will probably come towards the end of this year, when the Bank of England is likely to seek politically unpopular interest rate increases to stave off nascent inflation. Close reading of the Chancellor's speech suggests that he will acquiesce to a small rise.
The more difficult test relates to tax cuts. They will be hard to justify even in November 1995, given that the budget deficit is likely to remain large, though diminishing. The Chancellor may by then have succeeded in pruning public spending. Yet it remains unclear how he could defend reducing taxation while having to borrow considerable sums. His speech provided no hint of an answer to this vital question.
The Government has a clear framework for monetary policy: the Bank of England now effectively calls the shots. The snag is that there is no similarly strict framework for tax and spending policies. Politicians remain free to manipulate these economic tools for their own short-term ends. Until fiscal policy is as tightly defined as monetary policy is, no one can feel certain that Mr Clarke will remain faithful to last night's brave words once polling day looms.Reuse content