Letter: Balancing the Green Budget

Sir: In its Green Budget, the Institute of Fiscal Studies is being uncharacteristically guided by a political rather an economic judgement ("Green Budget urges Brown to go steady with tax increases", 28 May).

The UK economy is, if anything, in the fourth year of recovery, if not at the top of a boom. If a prudent fiscal rule is to balance the budget over the cycle then one should expect the UK budget to be in surplus rather than deficit. In addition, there is a strong argument to choose fiscal rather than monetary tightness at this juncture of the cycle, if only because of the exchange rate. To say, as the Green Budget seems to, that it is preferable to have an extra percentage point on interest rates, rather than a pounds 9bn take in extra taxes is to ignore the upward pressure the interest rate hike will put on the pound.

If the fiscal stance is not very tight and if the task of taking the heat out of the economy is to be performed by monetary policy, then the upward march of the exchange rate will inexorably continue. As the economy overheats, the Bank of England, with its new independence, will be tempted to push interest rates even further up. We will then witness a downturn by the second half of 1998 as exports suffer and the consumer boom finally peters out. This will reverse the downward trend in budget deficit.

If anyone thinks that a recession early in the political cycle will be good for the Government they should think again. That is exactly the sort of timing the Conservatives "enjoyed" in the last parliament.

Professor Lord DESAI

Director, Centre for the Study of Global Governance

London WC2