It is also true that exporters are squealing over our high interest rates, which have pushed the pound up to the sort of level that everyone agreed was totally unrealistic and unsustainable five years ago, when Britain was forced out of the European exchange rate mechanism. There is, of course, that advantage that if you are holidaying in France you can get 10 francs to the pound, which used to be a legend that grandfathers amazed small children with, along with amputations without anaesthetics and Labour governments - but that may not help all the people all the time.
And it is further true that we are in the middle of an overheated consumer boom of the kind that usually ends in tears sooner or later - even though it is not fuelled by anything like the amount of borrowing which got people into trouble last time.
But look at the doomsters' case. Central is their criticism of Gordon Brown, the Chancellor of the Exchequer, for failing to take sufficiently bold action in his Budget to dampen consumer spending, leaving the authorities with the sole instrument of interest rates to control excessive growth in the economy. There is a pleasing symmetry to their argument. While the phrase "one-club golfer" was minted by Sir Edward Heath to describe Nigel Lawson's reliance on interest rates in the last boom, Mr Brown made it his own, and it formed the backbone of Labour's opposition to Conservative economic policy at this point in the last cycle. But symmetry is no substitute for analysis. The circumstances are not the same. And it is not true that Mr Brown is relying solely on interest rates, having conveniently shunted off both responsibility and blame for raising them to a newly independent Bank of England. Within the constraints of Labour's election pledges, Mr Brown raised taxes as much as he could in his Budget. In particular, the big increase in stamp duty on house sales over pounds 100,000 and the advance notice of a further cut in the mortgage tax subsidy next April will help restrain house-price inflation. The wisdom of Labour's pledge not to raise income tax rates is being questioned retrospectively by City scribblers who want more cash taken out of consumers' pockets, and by Roy Hattersley, Labour's Lord Bountiful, who wants to give more to the poor. But it is too late now: Labour made that promise for the right reasons, and the electorate has endorsed it emphatically.
Gavyn Davies, one of the wisest of the City's wise persons, has written in our columns that if the Chancellor were to use taxes on the consumer as an economic lever, it would require massive rises to have any significant effect, and only then after a long lag. That was the reason for use of the tax system to fine-tune the economy becoming discredited. The present clamour for such fiscal meddling is therefore puzzling.
Equally puzzling is the amount of attention that has been paid to the fact that there have now been as many as four rate rises since the election. But these have been quarter-point changes, and so the total rise since 1 May from 6 to 7 per cent amounts to a single percentage point, which itself was the standard unit of movement in the bad old days. It may not be comfortable for home-owners, but financially committed adults are surely old enough to remember when Norman Lamont put rates up from 10 to 12 per cent in a day - and then threatened and withdrew a further rise to 15 per cent. The innovation of smaller but more frequent rate changes was one of the Conservatives' sensible responses to the uncertainty of economic futurology.
In any case, the criticism of the Government for hitting home-owners too hard contradicts the City lament that it has failed to clamp down hard enough on consumer spending. In his Budget speech, Mr Brown leant towards the City's concerns. Peter Lilley, the shadow Chancellor, yesterday had the disgraceful cheek to criticise Mr Brown for "doing nothing to persuade people to save their building society windfalls", when action to stem the piggy-bank cascade was considered and rejected by the Tory government because it was desperate to stoke the feel-good factor before the election.
That is why interest rates have to rise now, but the rise in the pound that higher rates have encouraged may well obviate the need for further rises. What the advocates of fiscal fine-tuning seem to have overlooked is the dramatic deflationary effect of having the pound back up near the DM3 level which has been such a benchmark in recent British economic history. Still, we should not swing too far in the opposite direction. Manufacturing exporters are bound to complain, and loudly, that they are being driven to the wall, forced to lay off workers and that recession is around the corner. But it should be remembered that they are in the minority.
Besides, by hinting that yesterday's rise was the last for the time being, thereby causing the pound to drop sharply on the foreign exchanges, the Bank of England might have managed to achieve exactly the policy mix that was required: higher interest rates and a lower pound.Reuse content