Chancellor tells Mansion House he will cut tax when 'prudent' as jobless figures vindicate policy
Clarke sticks by latest rate cut
By Anne Segall, Economics Correspondent
THE chancellor, Kenneth Clarke, last night defended his decision to cut bank base rates by 1/4 point to 5 3/4 pc against claims that it was was politically motivated.
He also attempted to calm City nerves by arguing that he would only cut taxes when it was "prudent and sensible" to do so.
In his fourth Mansion House speech, Mr Clarke told a City audience that the government was committed to a basic rate of tax of 20p and to abolishing capital gains and inheritance taxes altogether, but was constrained by the state of the public finances.
Reducing the budget deficit and the public sector borrowing requirement had been slower than expected but that was "emphatically not because we have been soft on spending", he said. He repeated his goal of getting public spending as a proportion of gross domestic product down from its current level of 42pc to 40pc.
The government has failed to achieve the improvement in the public finances which the chancellor set out to deliver by risking unpopularity with two successive tax-raising budgets.
He embarked on a programme of tax cuts last year but analysts believe his room to manoeuvre in his forthcoming November Budget will be limited. The public sector borrowing requirement is expected to overshoot this year's target of £22.4 billion by several billion pounds because of a combination of revenue shortfalls and weaker-than-expected economic growth.
Mr Clarke last night admitted that growth this year will fall short of the 3pc forecast made in his last Budget. New figures are to be published on July 9, and a reduction in the growth forecast to 2.5pc now looks likely.
He nevertheless insisted that the economy is "in very good shape" and that activity will accelerate as the year progresses. He dismissed suggestions that he is now preparing to throw caution to the winds in order to engineer a pre-election boom, arguing that he could not "single handedly engineer a rags to riches economic story within a year" even if he wanted to.
His aim was to get the fundamentals right and he would be taking no risks with inflation. "Ever since we started setting explicit targets for inflation we have achieved them. And I have no intention of breaking that enviable record now." Interest rates would be cut again if that could be justified in terms of the inflation objective, but the chancellor said he also stood ready to raise rates if necessary - however awkward that might be politically.
The government is committed to getting inflation down to 2 1/2 pc or less before the election. Analysts believe that that goal could be achieved ahead of schedule, within the next few months.
Bank of England governor Eddie George, who also spoke at the Mansion House last night, was careful to avoid commenting on last week's rate cut decision. There has been speculation that he advised Mr Clarke against making a move but the governor said that Britain's current record on inflation was so good compared with the past, that even if there was room for differences of interpretation about the state of the economy, the debate was being conducted on a very "narrow" basis.
He said the improvement in Britain's inflation record was "sustainable".
The decision to move interest rates in small steps of 1/4 point at a time was welcome, as they could then be reversed if necessary, Mr George noted.
