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British Rate Hike: Economic Pain Now Political Gain Later

BRITAIN'S chancellor of the exchequer openly admits that the primary reason why he has taken, or plans to adopt, tough new economic measures is to return the Conservative government to power in the next general election.

Kenneth Clarke surprised the London market on Sept. 12 when he raised interest rates for the first time in five years. The same day, he warned that there would be no tax cuts in his budget this fall.

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Mr. Clarke has since defended his firm line on both issues as a way of producing a political ``feel-good factor'' in voting for a new government, probably in 1996.

But he has alarmed supporters of the ruling Conservative Party who have demanded tax cuts and are fearful that the 0.5 percent interest-rate hike to 5.75 percent will erode voter confidence in the government.

Dismissing the criticisms as ``misguided,'' Clarke, who admits he wants to be prime minister some day, says an interest-rate increase was necessary to hold inflation at a target level of about 3 percent.

Clarke seems worried by signs of over-rapid economic growth. Official figures show that the gross domestic product is growing 3.7 percent a year. If that rate is not curbed, Treasury officials say, inflation is likely to reach unacceptable levels 18 months from now - in the run-up to the next general election.

In an article in the Sept. 16 London's Evening Standard newspaper, the Chancellor stated: ``Successful economics will always prove to be good politics. To win the next election, the Conservatives have to convince the voters that the economic recovery will last, leading to secure jobs and higher living standards.''

In remarks approved in advance by Prime Minister John Major, Clarke said his policies would promote ``the best kind of feel-good factor'' and ``enable the Conservative Party to win the next general election.''

Such frankness is unusual, but Clarke is an unorthodox politician. He's the first Chancellor to allow the Bank of England to have a big say in fixing interest rates and seems to have taken advice from Eddie George, the bank's chief governor.

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Mr. Major and his government face an uphill struggle to prevent the opposition Labour Party under Tony Blair from returning to power after years in the wilderness.

Officials at Conservative Party headquarters say Clarke has Major's support enforcing strong economic policies, in the hope they can ease taxes and interest rates before the people decide the government's fate.

Opinion outside politics, however, suggests that the policy is risky. Economic analyst William Keegan notes that, right after Clarke put up interest rates, the main mortgage-lenders hiked their loan charges.

The British Chambers of Commerce warned that Clarke's move could ``sabotage the economic recovery.'' The next day, retail-sales statistics showed a drop in consumer demand, prompting the BCC to complain that the government was ``failing to realize the fragility of the recovery.''

Howard Davies, the director-general of the Confederation of British Industry, says inflationary pressure remains weak. He has urged Clarke not to raise interest rates again.

But Norman Lamont, Clarke's predecessor, backed the Chancellor and said a progressive hike to a ``neutral interest level of around 7 percent'' would be ``likely and justified.''

Labour Party spokesmen say by attempting to defend his economic measures in political terms, Clarke is taking a gamble.

Mr. Blair has signaled that he intends to stress longer-term economic factors rather than attack individual government actions. He said Sept. 13 that the real problem Britain faced was the lack of a good industrial strategy. Tackling inflation was ``not simply about prudent monetary policy'' but about recognizing and confronting ``crucial structural weaknesses'' in the economy.

Clarke's hope that the Conservatives can reap the political benefit of stern economic measures in the shape of a feel-good factor is likely to be put to a test next month when both major political parties hold their annual conferences.

Conservative officials say dozens of motions on the party's agenda call for tax cuts and firm measures against inflation.

Jeremy Hanley, the newly installed Conservative Party chairman, greeted the Sept. 12 interest-rate increase by saying: ``I hope it is the last.'' He soon found himself the target of Treasury sources, who accused him of a blunder.

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