Leading Article: Take temptation out of the Chancellor's way

Jobs are up, dole queues down, price rises are slowing; the economic news could hardly be better. Compared to our record over the past few decades, the economy seems to be performing extremely well, and British economic policy appears very well balanced.

Indeed, history will judge Kenneth Clarke an extremely impressive Chancellor. Just think how much better he has been than his predecessors. Norman Lamont steered us through the ERM crisis - thanks for that Norman - and a dismal recession. Nigel Lawson stoked a boom by cutting taxes and prattling on about miracles, just when inflation was taking off. Mr Clarke, in contrast, has been a huggable hero, resisting the worst political pressures to go for growth or slash taxes in the run up to the election.

In a climate of widespread admiration for Chancellor Clarke, it takes some nerve to utter a dissenting cough. But it must be done. Ahem. We do indeed admire Mr Clarke. In his battles with the Bank of England many months ago, he - and not the Governor - was right about interest rates. In his battles with his party colleagues, he was right to resist their political pressure to open the empty public purse for tax cuts, or to go for growth.

But that's not the point. Just because one Chancellor has handled things well in the past doesn't mean he is pursuing the right policy now. Nor does it give us good reason to be confident that our Chancellors will be as virtuous in future.

The trouble is that our expectations have been lowered too far by countless economic failures and mistakes in the past. When Ken Clarke swans in and gets a few things right, we all fall over in astonishment, and assume the historical problems with Britain's policy performance must now be solved. Sadly, that is not the case.

Consider for a moment the temptations facing even the "virtuous" Chancellor Clarke right now. He may be right that no further rise in interest rates are needed. He may be correct that inflationary pressures are not growing - despite the falling unemployment, rising wages, booming house prices in the capital, and rising consumer spending that the Bank is so concerned about.

And then again, he could be wrong. He could be pushing our luck - our luck, not his, for the election will be long gone by the time we discover the answer.

As the Chancellor has always been keen to point out, judgements about economic policies don't just rely on statistics - the facts and figures only tell us what was happening several months ago. They don't tell us where the economy is going. A bit of nous, a bit of instinct, a bit of chatting with constituents and sniffing the air can go a long way. But sniff the air now, and it smells as if the economy is flowering. People are shopping, buying houses, smiling even, despite the miserable weather.

No one believes that inflation is about to explode out of control any minute. But if the pressures are welling, and they aren't nipped quickly by a quarter point or half point rise in the cost of borrowing now, then interest rates will have to go up by a lot more later on.

But from Ken Clarke's point of view, why should he bother putting rates up now? Why not take a punt on inflation staying low?

Mr Clarke is bound to gamble a little here and there. Who can blame him? There is an election looming, after all, and he is, first and foremost, a politician. The trouble is that Chancellors will always face the temptation to delay difficult decisions under pressure from the electorate or from party colleagues.

Investors, employers, workers and voters all know this. That is why, in the end, we all expect governments to give in when things become grim, to loosen up a little, and to allow inflation to rise. As the financial markets testify, people generally expect British inflation to be higher than it is in countries where monetary policy is taken out of the hands of politicians and handled by a central bank. As a result our interest rates are higher, and our businesses and our mortgage holders have to fork out more.

So why don't we take a deep breath and tie our politicians' hands? Why not take short-term monetary policy decisions out of the hands of politicians and give them to the bankers and economists instead? So long as politicians, accountable to voters, set the overall framework, democracy would not be violated. The job of the Chancellor would be to set the inflation target. The task of the technocrats in the Bank would be merely to monitor the economy and adjust interest rates in order to achieve it. While politicians and technocrats agree that there is no long- run trade-off between inflation and unemployment, and that there is nothing to be gained by adjusting our inflationary target month by month, then government loses nothing by handing over the control of interest rates.

Of course the Bank would need to get its act together. This year's record on economic advice has not been brilliant. The Old Lady of Threadneedle Street could do with a little shaking up if she is to cope adequately with her new responsibilities. She will of course make mistakes from time to time, just as politicians do. And she could do with a little more time spent sniffing the air, and getting a sense of what's going on to balance her dry statistics.

But at least she wouldn't have a five- yearly incentive to get things wrong deliberately, as politicians often have. The fact that Ken Clarke has done a pretty good job of resisting the political incentives to screw up shouldn't blind us to the fact that they are powerful and damaging nevertheless.