Letter: A golden economic opportunity

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Sir: Does the short-term management of the economy require the next step to be a rise or a reduction in interest rates? This question is posed by Hamish McRae ('Beware the boom', 30 April). On the one hand, the present comparative strength of sterling and the possibility of a further reduction of the German rate of interest set the stage for the further reduction in our interest rates in order to support our economic recovery. On the other hand, the economic recovery may be so strongly based that we should rather raise interest rates to prevent an inflationary upsurge. Mr McRae throws his weight in favour of monetary restraint.

We should not, however, neglect longer-term structural problems. We need to establish an economy of monetary ease for the promotion of domestic investment and the maintenance of a competitive foreign exchange rate, to reduce our excessive balance of payments deficit. This longer-term structure will be formed by successive short-term policies.

We should not miss the present golden opportunity of taking a step towards our ultimate objective. We should at the very least reduce domestic interest rates sufficiently to prevent any appreciation in the foreign exchange rate.

But what about any consequential threat of excessive inflationary pressure on current domestic resources? The logical answer is simple enough: combine the short- term policy of relaxed monetary policy with a short-term restrictive fiscal policy that would restrain the growth of consumption sufficiently to prevent any inflationary excess of total expenditures.

But, alas, we do not have the possibility of this simple short- term combination of monetary ease and fiscal restraint. The best that could be done at present would be for the Government to take all possible reasonable measures to postpone budgetary expenditures and simultaneously to announce that it would, at a special early autumn budget, offset by fiscal measures any actual or threatened rise in the rate of inflation above its 4 per cent target.

Meanwhile, may not present credit card arrangements enable us at long last to introduce a short- term fiscal regulator? Let every financial institution that issues credit cards keep a record of the date at which it financed each individual's credit card expenditures. Let the Government have the power at short notice to set a rate of tax that must be levied and paid by the financial institution on all subsequent credit card expenditures; the financial institution being liable to pay the tax and charging the relevant tax against each individual's account. In this way could not a quickly adjustable disincentive be operated against a large range of consumption expenditures by a reasonably simple administrative arrangement?

I put this idea forward very tentatively for discussion by those who are familiar with the problems of credit card finance.

Yours faithfully,