OPINION - VIEW FROM THE HOUSE

The City was surprised, but delighted by the Chancellor’s decision to give the Bank of England the freedom to set interest rates. This is a Liberal Democrat policy previously resisted by Labour.

The markets welcomed the commitment to long-term low inflation by immediately reducing long-term interest rates.

The icing was taken off the cake, however, by Gordon Brown’s subsequent announcement that he was moving away from Labour’s manifesto commitment to stick to the last government’s target inflation rate of 2.5% or less to a target of 2.5% within a 1.5% to 3.5% band.

This relaxation is presumably designed to create space for a more expansionary approach, implying inflation can be too low. But low inflation is not sufficiently rooted to make this anything other than a risky strategy.

The markets are happier that the Chancellor has squeezed into a public-spending straitjacket and thrown away the key. He has said more than once that for the next two years departments must keep within the spending limits set by the last government – despite being set at levels not even approached by Margaret Thatcher. Indeed, Ken Clarke has said the limits would have been reviewed had the Tories won the election.

Even if savings are found in one department, they will not be transferred to another, higher-priority department (from social security to health or education, for example).

This will disappoint many as it means the crisis in the health service cannot be resolved without further cuts and, as has been implied, charging for services. It also means, for example, class sizes in schools will rise before they can fall.

A Budget cut in VAT on domestic fuel and the windfall tax for a welfare-to-work programme will not address this. Any other new taxes must go to reducing borrowing. This may create the platform for an expansion in spending on public services in the second half of the Parliament – but the problems will be more acute by then and require far more attention than if they were dealt with now.

Addressing the long term may be admirable, but Gordon Brown would do well to remember Keynes’ dictum: ‘In the long run we are all dead.’

Malcolm Bruce is Liberal Democrat MP for Gordon and the party’s Treasury spokesman.