Clarke's tough inflation target `is risky'

Kenneth Clarke, the Chancellor, may have set too tight a target for future inflation risking "loss of credibility" if it is not met, the cross-party Treasury and Civil Service Committee warned yesterday.

In an assessment of the Budget, the committee said the Government had failed to meet its own objective in cutting expenditure in the current year, that the much vaunted private finance initiative had proved disappointing and that it was not convinced by the Chancellor's forecast of a big jump in business investment.

The review of the Budget concluded that Mr Clarke's broadly neutral fiscal stance was the appropriate one and that publication of the minutes of his monthly meetings with the Governor of the Bank of England had significantly enhanced the credibility of monetary policy.

There were, however, "some areas of concern" about that "new deal" the committee said, not least the specific target of holding inflation to the lower half of the 1 per cent to 4 per cent range by the end of the parliament. "There is a danger with this,"the committee said. "There are extreme difficulties in predicting and meeting even broad targets for inflation two years hence . . . and to set such a narrow target risks loss of credibility if the target fails to be met."

The target of having inflation below 2.5 per cent "may either force the introduction of a particularly tight monetary policy, dampening the recovery, or cause the Chancellor to break a stated aim which could undermine the credibility of the `new deal' for monetary policy". They recommended that the Central Statistical Office should publish another monthly measure of inflation excluding indirect taxes alongside the retail price index.

The decision to raise alcohol duties was also criticised, because of fears that it could damage the UK industry.

The bigger-than-expected fall in inflation had allowed a cash cut in this year's spending, but in real terms it had continued to grow, the MPs said.