POLITICS

Kenneth Clarke is a post-Lawsonian Chancellor.

Can he deliver post-Lawsonian inflation?

BRUCE ANDERSON

The Chancellor's performance was mas- terly. Ken Clarke never lacks self-confi- dence and sometimes he can be so confi- dent as to sound lackadaisical. But on Tuesday the balance was perfect. Sharp- ened up by Monday's mini-debate on Europe, Mr Clarke fed off his hecklers while sounding masterly. It was the finest piece of Budget theatre since Nigel Lawson — which is paradoxical. Mr Clarke is the first post-Lawsonian Chancellor.

Technically, Nigel Lawson was at least as well-qualified to be Chancellor as any pre- vious holder of that office, and he liked to prove it. He enjoyed jousting with his Trea- sury knights, and encouraged his officials to produce learned papers. A dominant figure who had been Chancellor for a longer peri- od than anyone since Lloyd George, his method of conducting business was bound to influence his immediate successors — especially as both of them, John Major and Norman Lamont, had served under him at the Treasury. This was especially true of Mr Lamont, who has always been in awe of Nigel Lawson. Mr Major and Mr Lamont both tended to believe that a Chancellor ought to be able to discuss the arcana of monetary policy with Sam Brittan.

Ken Clarke has a different approach. 'If you want to discuss M4,' he will say cheer- fully, 'there is an official down the corridor who is just the man you need. My job is to talk about the British economy.'

This may not reassure all the economic commentators. Some of them do want to discuss monetary policy; they fear that it is too loose. Eddie George was in the gallery to listen to Mr Clarke's Budget, and so were the two previous Governors who are still alive, Lords Richardson and Kings- down. It was interesting that the custodians of counter-inflation should have turned out in such force. 'Eddie will keep me steady,' Mr Clarke insisted. Not everyone believes him; there are doubts about the strength of his commitment to post-Lawsonian infla- tion.

In economic terms, inflation was much the most crucial element of Mr Clarke's Budget judgment. The Chancellor believes that Britain can now achieve lasting non- inflationary growth. He has also committed himself to taking any necessary corrective action. But some monetarists are worried by increases in the money supply. They are aware of political constraints, but they would ideally have preferred a much tighter fiscal and monetary policy. They also fear, from past experience, that if the British economy does go into an inflationary cycle, only the most brutal interest rate regime can halt it. We will not know for at least a year whether the Chancellor or his critics are right.

Monetary policy is still dogged by the same problem which has remained unsolved since 1979. These days, few peo- ple would dispute the commonsense propo- sition that excessive monetary growth caus- es inflation; but how is monetary growth to be measured or regulated? In recent years, the monetary indicator with the best pre- dictive record has been MO: notes and coins. But it is hard to believe that this is more than a coincidence. In a world in which plastic is a major currency, while credit creation is increasingly sophisticated — and international — it would seem absurd to argue that notes and coins can tell us what is happening to the economy.

Back in the early Eighties, when Geof- frey Howe was searching for monetary cer- tainty (a process which has been admirably described in a recent book by Edmund Dell*), the late Nicholas Ridley told him that he would be well advised to manage the economy by the seat of his pants. Geof- frey was cross; he thought Nicky was being frivolous again. But that apparent frivolity overlaid seriousness and wisdom. In the early Eighties, the seat of its pants ought to have told the Government that monetary policy was far too tight, even if sterling M3 did seem out of control. After 1987, the housing market should have alerted the Government — and commentators like me who thought everything was going well — that there was trouble over the horizon.

Today, matters are less clear. The hous- ing market is recovering, which is desirable, but there is no sign yet of inflationary rises. Commodity prices are still behaving, as are producer prices and earnings. There is no sign of inflation in the real economy. Ah! some monetarists would reply — by the time such signs appear, it will be too late. Then again, some of the Government's most persistent monetarist critics, especial- ly Nick Budgen and Tim Congdon, almost justify Denis Healey's crack about sado- monetarism; they give the impression of believing that in Britain all economic activi- ty is inflationary. There are three grounds for disregarding the pessimists. The first is historical. Bor- rowing was to the Eighties what sex was to the Sixties. As a result of cultural and tech- nical changes, previously undreamt-of lev- els of permissive behaviour became com- monplace. In 1979, relative to income, the average British family had borrowed half as much as the average American family. By 1989, we had caught up. Credit creation on that scale was bound to be inflationary, whether or not the deutschmark was shad- owed. But it was a once-for-all effect, made possible by the lifting of credit controls. At most times, most borrowers behave sensi- bly: there is no reason to fear another explosion of credit on a mid-Eighties scale.

The second reason is psychological: atti- tudes to inflation have changed. When it goes over 3 per cent, there is nervousness, even though last month's increase was merely a technical blip, as the Treasury press office ought to have been pointing out weeks in advance. If inflation were ever to reach 4 per cent, there would be a crisis. The tolerance-cum-resignation approach to inflation is now part of economic archaeol- ogy. That is a most encouraging indicator.

The third reason is economic. As has been proved by the recent rapid falls in unemployment, the supply-side reforms of the Eighties are working. In Britain, the danger always was that because of a weak supply side, monetary growth would turn into wages and prices rather than, as in America, into output and jobs. We are now a much more American economy, and the benefits are self-evident.

There is no consensus among seat-pants; we will have to await events. Inflation will be the judge and the jury, said Nigel Law- son. So it was. The same legal apparatus now confronts Kenneth Clarke, and though he has eschewed Lawsonian triumphalism, he has every hope of an eventual acquittal.

Which leaves only the supreme political court: the electorate. Two phrases stand out from the Chancellor's Budget briefing: there have been 25 tax cuts in the past cou- ple of years, while the average family will be aver £1,000 a year better off in 1997 than it was in 1992. If the Tory Party's pro- pagandists can ensure that these two facts are in every voter's consciousness by 1 May, there will be a significant political impact.

*The Chancellors (HarperCollins, £25)