No pain, no gain for the Chancellor

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The Independent Online
MOST people just have to work hard in difficult jobs. But being Chancellor of the Exchequer, we are asked to believe, is something else again. For Chancellors, life is a never-ending succession of Agonising Dilemmas, Painful Decisions and Awesome Responsibilities. Then comes the Budget Day miracle. Shrugging off the agony, the pain and the awe, the Chancellor rises to his feet to reveal that, lo, the dilemmas have been ingeniously resolved, the decisions sturdily taken and the responsibilities, each and every one of them, bravely discharged.

One does not mean to mock. It's just that even with the least stuffy Chancellor imaginable in Kenneth Clarke, the relaxation of Budget 'purdah' and the sensible unification of the spending and revenue-raising announcements, the whole business remains rather absurd. Somehow, yesterday's 0.5 per cent base rate cut so carefully presented by the Bank of England (a whole week in advance of the Budget]) does more to underline than undermine the point.

What is so debilitating about Britain's eccentric Budget Day drama is the idea that this is the defining moment for the conduct of economic policy - that from the Budget will flow either jobs and prosperity or slump and misery. We still don't seem to understand that things which really determine whether or not we have a competitive economy are not the stuff of Budgets. If Mr Clarke was going to tell us about his plans to deliver nursery education to every child of pre-school age, or his blueprint for the reform of A-levels, we might have something to get excited about.

The truth of the matter is that while Chancellors have the capacity to inflict great damage if they get things wrong, they can only hope to make a positive difference at the very margins of economic performance. The Chancellor's job is essentially negative. On the monetary side, it is to ensure that there is sufficient growth in the money supply to allow the productive potential of the economy to be realised while still bearing down on inflation. On the fiscal side, it is to distinguish between cyclical and structural borrowing, while preventing the overall level of debt from turning into an unsustainable future burden.

If Mr Clarke were to make a complete hash of things next week, he could push the economy back into recession and lose the Government the next election. If he gets it more or less right, he will have done little more than to allow the economy to work through its own salvation. He resembles Viscount Jellicoe, the commander of the British Grand Fleet at the Battle of Jutland, who knew that the only decisive naval action of the war would be one which he lost.

Mr Clarke's job next Tuesday is not to try and lever up the performance of the British economy, it is to reduce risk. That risk can be summarised very simply. Three years of quite deep recession, a pre-election government spending spree, an out-of- control social security system and declining oil revenues have transformed Britain's public finances from super-strong to distinctly dodgy.

On the face of it, that looks like a good argument for higher taxes. The trouble is that the recovery, despite the encouraging rash of statistics over the past 10 days, is still in its fragile infancy. Last March, Mr Clarke's predecessor, Norman Lamont, put in place delayed tax rises which together will produce an extra pounds 6bn of revenue next year and another pounds 4bn in 1995. That is serious money: in fact, the biggest tax hike, in real terms, since 1945. The economy can probably just about cope, thanks to the monetary loosening which began last year and has yet to exert its full effect.

The judgement for Mr Clarke - or Agonising Dilemma, as it is traditionally known - is whether to leave well alone and accept a disappointingly gradual reduction in the public sector borrowing requirement or push for more revenue in the hope of pleasing the markets and leaving a bit of room to bribe the voters before the next election. A more aggressive fiscal stance could also be offset by further cuts in interest rates and a slightly cheaper pound.

The latter is the gambler's option. By a further extension of the scope of VAT and the phasing out of tax allowances on mortgages and pension contributions, the tax base could be substantially widened. With inflation subdued and European interest rates edging downwards, the risk to sterling should be limited. Indeed, it could be argued that a tight fiscal policy to restrain domestic consumption and the combination of low long-term interest rates and a competitive exchange rate to encourage investment and exports is exactly the mix which the economy requires if the twin structural deficits - budget and balance of payments - are to be tackled in a meaningful way.

But a gamble it would be in both political and economic terms. The gamble for the economy is on the inflation front. Monetary policy is powerful medicine which operates with long and unpredictable lags. Those who say that inflation is yesterday's battle and that the pound can look after itself may be right, but if these siren voices are wrong, the result would be rising interest rates in the run-up to the next election and a new lurch into recession. Politically, the Government is also likely to get much more blame for tax rises which will never be reversed than credit for temporarily lower interest rates. The Government's parliamentary majority simply does not allow it to be brave.

If Mr Clarke wants to minimise risk, he should confine himself to a little judicious tidying of the tax system. If he does want to broaden the tax base, he must at least offer the prospect of a quid pro quo of generally lower rates. If yesterday's cut in base rates is all the Government is planning, any significant further fiscal tightening would put in jeopardy next year's 2.75 per cent forecast for growth. As it is, the Chancellor may want to shave a bit more off rates next April, when the tax rises already in the pipeline come on stream.

The overriding priority for Mr Clarke is that he should do nothing which inhibits the natural recovery mechanisms at work in the economy. The budget deficit is a real problem and one which will not go away on its own, but it does not warrant a panic response (Mr Clarke, thankfully, is not one of nature's panickers). Although the ratio of public debt to national income is rising, it is high neither by historical standards nor in comparison with the rest of Europe. By this time next year, the economy may be robust enough to take another fiscal shock. But right now, the Chancellor should take the Painful Decision just to sit on his hands.