In his shadow budget before the election, John Smith provided for the sort of boost to infrastructural investment which now, albeit on a larger scale, the Japanese government is proposing. It was the Chancellor's decision to go for an income tax cut which exacerbated the deficit without providing the needed stimulus.
Nor are you correct, Sir, in predicting that had Labour won, the pound would be already devalued by now. In office, the Labour Party would have faced the problem of establishing credibility in a difficult situation. Having entered the ERM in October 1990, the government has managed to fritter away the gains of such credibility as it had established, by underestimating the depth of the recession and indeed further undermining any hopes of recovery by the irresponsible talk of zero inflation. Even within the confines of the ERM, much could have been done on the fiscal front, if only we had an active Chancellor.
As it is, the irony is that, despite having borrowed 10 billion ecu, the Government may be able to avoid neither an increase in interest rates nor yet a Finnish-style float. The responsibility in that case will be neither that of the Bundesbank nor yet of the Federal Reserve.
Development Studies Institute
The London School of Economics and Political Science
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