CITY AND SUBURBAN
One year on, we still have a policy that fits like a bell-tent
CHRISTOPHER FILDES
This time last year we had an economic policy. In fact, we had two, both wrong, with the Treasury vainly hoping that they would cancel one another out. We had a tight monetary policy: an artificially high exchange rate, high interest rates to keep it up, bank lending at a standstill. For an economy in its third year of recession, with people and business still trapped in debt, with asset prices (most obviously houses) in a downward spiral, this was as perverse a policy as could be imagined, but it was forced on us by the ERM mechanism and we seemed to be stuck with it. Officially, of course, the ERM was the miraculous lode- stone that would lead us to the heart of Europe, but to cope With its side-effects we had to have another policy, a loose one. This was the fiscal policy — Government borrowing and spending — and it fitted like a bell-tent. The budget deficit accelerated from a standing start to £50 billion. Then came the day in mid-September when all this was no longer credible. The pound was blown out of the water, the ERM commit- ment was destroyed, and we needed a poli- cy or two. The death-grip of monetary poli- cy had to be released and the dropsical fis- cal policy had to be stiffened. One would be pleasurable, one would be painful and, just as I thought, the pleasure was taken at once and the pain left for another day. Interest rates tumbled, but public spending swelled and Norman Lamont's last Budget met it with a post-dated cheque. After that he had to fight the spending departments with one hand and fight for his job with the other. He lost. The Treasury, says a Whitehall warrior, was done over. One year on, we could have an economic policy, or, better still, a matching pair — but not yet.
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