The Eurosceptics believe the answer is to leave the exchange rate mechanism, devalue the pound and cut interest rates. The Prime Minister, his Chancellor and the leader of the Opposition are all committed to the ERM. In Japan the solution is a Keynesian-style pounds 2bn boost to the economy, something held up as an example by Gordon Brown, the Shadow Chancellor. A similar UK package is rejected by ministers alarmed by the pounds 28bn public sector borrowing requirement. Public works to get Britain going are not on the agenda for a generation of politicians steeped in Thatcherite thinking.
The champion of Conservative interventionism, Michael Heseltine, who sits on a number of powerful cabinet sub-committees, remains uncharacteristically quiet at the Department of Trade and Industry (or, as he prefers to call it, the Board of Trade). He is not to be written off and, should pressure continue on Norman Lamont over the next year, might see himself as the natural successor. But, for the time being, he is a loyal supporter of the Chancellor's strategy of digging in for a long haul.
The flame of Keynesianism, however, does flicker in one remote corner of Whitehall. Lord Walker (formerly Peter Walker), now retired from full-time politics, chairs a new agency designed to kickstart the economies of the inner cities. His is a remarkable comeback for an amazing political survivor. Purged by Margaret Thatcher in the Seventies, Peter Walker had served as Secretary of State for Agriculture, Energy and then Wales. In this last post he defied the tide; there may have been no economic alternative in England, but in the valleys it was different.
Under Edward Heath in 1970, Mr Walker, then 38, was appointed Minister of Housing and Local Government and soon received the grander title of Secretary of State for the Environment. There he launched projects covering housing improvement, road building and a scheme to clear derelict land in former coal and steel areas.
During this high watermark of Conservative Keynesianism, he appointed a group of councillors, businessmen and ministers, including Michael Heseltine, to examine schemes to help six urban areas. Mr Walker did not stay long enough to see the project through, moving on to the Department of Trade and Industry. He was offered a choice of Mrs Thatcher or Geoffrey Howe as junior minister and - fatally - chose the latter.
Now Lord Walker is back as chairman of a new Urban Regeneration Agency conceived by none other than Michael Heseltine. Announced during the election, the URA was seen as a scaled-down version of the English Development Agency, long advocated by Mr Heseltine. After the Tory election victory, Mr Heseltine moved from the Department of the Environment and thus responsibility for the URA.
His replacement, Michael Howard, is an ardent free marketeer and Lord Walker offered to resign, a move swiftly rejected by Mr Howard.
On paper, Lord Walker will be a very powerful man indeed. In practice his scope is limited. Even those on the wet wing of the party argue that a fully-fledged English Development Agency would merely compete for the same limited pot of investment as the Welsh and Scottish agencies. Lord Walker has gained from existing funds grants worth about pounds 100m a year, including City Grants and Derelict Land grants. Once ensconced at the DTI, Mr Heseltine overrode earlier departmental objections and surrendered to Lord Walker the English Estates arm of his DTI empire which owns and sells land. The URA will depend for most of its income on sales made by English Estates. Consequently the property crash strikes at the heart of the initiative and undermines Mr Walker's most powerful asset. Whereas in the Seventies, the answer to urban squalor was to put up a commercial block, many cities now have a surplus of office space.
Lord Walker is debating whether his efforts should be directed to building homes while pressing for a relaxation of controls over council house building. This is fraught with difficulties because new house building could depress property prices further. Housing associations, with which the URA might co-operate, are subject to tough financial constraints and building homes is costly. Here Lord Walker comes face to face with the concerns of Tory MPs who were in short trousers when he began his parliamentary career. At the Department of the Environment, ministers have responded by considering measures to kickstart the moribund housing market, the engine of growth in the mid-to late Eighties.
But the debate has shown a Conservative Party in several minds about property, unsure whether it is the cause of the problem or the key to the answer. The catch is this: without a healthy property market, growth is stymied, but a vibrant housing market siphons off a disproportionate amount of national savings. Economic hardliners decry the amount of money tied up in bricks and mortar, inevitably at the expense of investment in industry. Constituency activists demand an extension of mortgage interest tax relief. Meanwhile some voices warn of a worst case scenario in which the fall in property prices causes building societies to fail, plunging the economy into acute crisis.
Mrs Thatcher's populist instincts were regularly excited by the idea of extending tax relief but her successor, schooled at the Treasury, is not so inclined. Before the election, serious thought was given to its complete abolition. Mr Lamont was said to be in favour. The Treasury envisages a new climate of stable growth and low inflation where a house is a home rather than a sure-fire investment. The Department of the Environment wants to see an increase in the rented sector.
Many Tories are united in the belief that short-term measures to stimulate the market seem impossible to get right. The stamp duty holiday, intended to boost the market briefly did, indeed, produce a flurry of sales before the deadline expired. But prices might well have suffered after the duty was reimposed.
The most likely package of measures would be one which expands the cash incentive schemes to urge council house tenants to leave their properties. This frees up a home and usually results in the grant being reinvested in the property market.
Another potential initiative might provide funds to turn building societies into the new landlords of the homes they have repossessed in their thousands.
In the meantime the economic prognosis remains gloomy. The one interventionist bid to revive the inner cities has to wait for a medium-term recovery. Perhaps the last laugh belongs to Mrs Thatcher and her enduring dream of a property owning democracy.
Donald Macintyre is on holiday.Reuse content