Days of boom and bust are over, Clarke promises

KENNETH CLARKE yesterday moved to quash speculation about an early cut in taxes with a clear warning that public spending would have to be squeezed first.

Dismissing calls by some backbenchers and right-wing ministers for tax cuts after the Tories' heavy defeat in the European elections, the Chancellor told a City audience at the Mansion House: 'We will cut taxes but only when we can afford to do so and not before we can afford to do so.'

He said: 'The public are usually more sensible than politicians or the press. They will not put their confidence in a government that cuts taxes before getting borrowing under control.'

The overall thrust of Mr Clarke's speech, however, was the Government's determination not to let this recovery burn itself out in the same way as happened in the late 1980s.

The commitment to general economic stability was based on the Bank of England's new high-profile role in setting monetary policy, ensuring that interest rate changes were made on economic grounds alone. And the priority of fiscal policy was to shrink government borrowing and curtail public spending to lower and more sustainable levels, the Chancellor said.

Signalling tough summer negotiations on public spending, he said low expenditure was the key to lower taxes. The Government's 1995-96 control total of pounds 263bn - public spending over which it has direct control - was a ceiling, he said in a hint that he would like to see spending bids come in below that figure.

In addition to the April increases, taxes are due to rise this autumn, bringing the extra tax raised in 1994-95 to pounds 1.675bn. This will be followed by a further pounds 4.895bn in the fiscal year starting next April, including a second stage increase to 17.5 per cent in value-added tax on home heating bills.

Mr Clarke referred to City fears that politicians hankered after 'a little inflation' to stimulate higher interest rates for savers, higher wages, and higher house prices. 'What a temptation to ministers who need a 'feel-good' factor to go with the recovery. Speaking as a politician I say that would be very bad politics.'

In a further sign of Treasury determination to clamp down on spending, the Chancellor said his medium-term aim was to squeeze back general government spending. The state's overall public spending bill should fall below 40 per cent of national income from nearly 44 per cent today.

The Chancellor coupled an upbeat assessment of economic prospects with a hint that he was unlikely to cut base rates any further. 'I believe our economy is now strong enough to sustain growth rates that everyone knows I would like to see.'

Speaking to the same audience, Eddie George, Governor of the Bank of England, said a rate rise was inevitable. But the economy was still making up for output lost during the recession and the point at which rates would have to be raised 'may still be some way off'.

Gordon Brown, the Shadow chancellor, said later that Mr George 'does not believe the Chancellor's policies are credible'. He added: 'Even in an economy barely out of recession, he believes the Chancellor's policies point 'inevitably' to interest rate rises. . . hitting homeowners hard.'

Mr Clarke went to great lengths to reassure the markets of his anti-inflation credentials. 'A fraudulent inflationary 'feel good' would soon turn to 'feel very bad' as the bust followed the boom.' Inflation was 'a silent thief that robs the elderly and cheats the saver. A little more inflation is simply not an option for this government.'

Underlining the significance he attaches to the Bank's new powers, Mr Clarke called his decision to publish the minutes of the monthly monetary meetings with Mr George his most important monetary policy decision so far. In turn, the Governor said the new powers provided a better chance of moving towards price stability 'than at any stage in my professional lifetime'.

Mr Clarke said that with the Bank's views on monetary policy regularly available to the public, he had created one of the most open systems for interest rate decisions in the world. 'I have given today's politicians and tomorrow's politicians no choice but to pursue the path of low inflation to which we are so clearly and publicly committed.'