Have the wheels come off Labour’s economic policy? Manufacturing and agriculture are moving into sharp recession. The balance of payments is deteriorating rapidly. Calls for the monetary policy committee to reduce interest rates sharply are becoming increasingly shrill.
Gordon Brown claims inflationary pressures are too high because Kenneth Clarke failed to cut interest rates before the election. So, his first action was to adopt the Liberal Democrat policy of giving the Bank of England operational independence.
OK. But, Brown has had two Budgets of his own. In these, he conspicuously failed to put up consumer taxes (except for petrol) and instead taxed savings and hard-pressed businesses.
The wisdom of pledging no increase in income tax over a parliament looks increasingly questionable. Had it gone up after the election, consumer spending would have slowed down and the cuts in health and education spending halted.
This, in turn, would have allowed a more even distribution of spending over the parliament. Instead, we have had a bust and boom which first damaged public services and then required a catch-up that may itself prove inflationary.
The government’s claim that spending on health and education will rise over the parliament in real terms by 3.7% and 2.6% respectively will only be achieved if inflation averages 2.5% or less for each of the next three years – something that has not been achieved before.
And Labour’s argument that the extra money for health and education could be partly funded by cuts in the welfare budget have ended in tears with the sacking of Harriet Harman and the resignation of welfare reform minister, Frank Field.
Welfare spending rises and falls with the economy, which suggests it may rise as the economy slows down before it falls as growth picks up again.
Gordon Brown cannot credibly change the terms of reference for the MPC before they have been tested through a cycle. He could, however, accept his responsibility for a fiscal policy that balances the economy and allows the inflation target to be met at lower and less frequently changed interest rates.
Malcolm Bruce is Liberal Democrat MP for Gordon and the party’s spokesman for Treasury affairs.
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