Brown rides to the rescue again

When the Bank of England was granted operational independence over monetary policy - ie the freedom to decide when and by how much interest rates should change - the Treasury was surprisingly relaxed about this loss of power.

Indeed, some officials had been urging such a move for years, and we now know from papers published under the Freedom of Information Act that the Thatcher/ Major governments mulled over the issue four times between 1988 and 1993, not just on the occasion when Nigel Lawson's proposal was overruled by Mrs Thatcher in 1988.

Lawson, having abandoned monetarism and failed to persuade Thatcher of the counter-inflationary advantages of joining the European exchange rate mechanism, had resorted to Bank independence as a last throw. He amazed his officials when he first suggested it, but the idea grew on them as inflation rose again (to over 10 per cent) and everything else had failed.

Apart from the hope that depoliticising interest rate decisions would lead to more successful policies, Treasury officials also reckoned that the move would usher in smoother relations between the Chancellor and Prime Minister of the day, because such decisions had been a source of chronic friction.

Another point was that the temptation for a Chancellor to announce a reduction in base rates during Budget week - one to which they had often succumbed - would now be removed. Often, especially with elections approaching, Chancellors could not resist overdoing the largesse, with the day of reckoning all too easy to forecast.

In the end the Conservatives eschewed Bank independence, and chose to join the ERM, with disastrous consequences for them and the economy, a point that Labour never tires of bringing up, while not dwelling too much on the way they, too, were enthusiastic supporters of ERM membership.

We can be reasonably sure that in his Budget speech on Wednesday Gordon Brown will contrast the 'stability' that has reigned under the era of Bank independence and his 'fiscal rules' with the shambles of macro-economic policy in the 1980s and early 1990s.

He will not, of course, be announcing any changes in interest rates, and the Monetary Policy Committee left rates alone last week. This gives the MPC one more meeting (on 6/7 April) before the election, if it is held on 5 May. The Bank announced last Septem ber that, in the event of a general election being called on a day scheduled for an MPC meeting, that meeting would be postponed for 48 hours. So that rules out an MPC meeting on 5 May, if that is indeed the date of the election.

Some members of the MPC have been dropping heavy hints of increases to come: Paul Tucker constituted a minority of one in voting for a rise last month. The hawks (I know the Governor does not like the term, but everybody knows what it means) are concerned about marginally higher inflation coming from wage settlements and what we used to call 'wage drift' (employers bidding up wage rates because of shortages of skills), as well as from higher import prices, not least of oil. (The oil price appears to have settled in a higher range than many analysts had hoped.)

But the recent run of statistics and general reports about retail sales, car sales and consumer spending generally suggests that the economy may be somewhat weaker than the Bank has recently forecast. We are in the world of decimal points here, but the National Institute of Economic and Social Research estimates that gross domestic product grew by 0.6 per cent (an annual rate of just under 2.5 per cent) in the three months to February, against the MPC's forecast of 0.7 per cent for the first quarter (an annual rate of nearly 3 per cent).

It is not obvious that interest rates need to rise, and, if there were to be a sudden collapse in consumer spending or house prices, there might even be a reduction. For the moment there simply does not seem to be enough evidence to justify an increase. At all events, the Chancellor approaches the Budget without any obvious embarrassments on the monetary policy front.

He also seems to be in good shape - for the moment - on the fiscal side. But he must have had some nervous moments - until the tax revenues suddenly began to cascade in.

Wolf has been called a number of times, but in the fairy tale the wolf did eventually appear. While Gordon Brown can boast about growth and stability on Wednesday, almost every respectable outside institution - from the Institute for Fiscal Studies to the International Monetary Fund - expects that taxes will have to rise by even more during the next Parliament than has already been budgeted for - and that is quite a lot, given the Chancellor's ambitious spending plans.

Since the real concern has been about whether he would meet his fiscal rules during this cycle (he has), there is not much scope for huge giveaways on Wednesday, not least because of the public spending decisions that have already been, to use a favourite Brownian phrase, 'locked in'. There will presumably be a number of measures aimed at improving the supply side of the economy - the Chancellor has become obsessed by the 'China Challenge'. But there is still a long way to go in bringing this country's infrastructure up to European standards.

Now, when that historic decision to hand monetary policy over to the Bank of England was taken, it left a vacuum. Instead of arguing over monetary policy, the present prime minister and chancellor have argued over everything else, including Brown's role in the election campaign.

Having decided to insult Brown and put Alan Milburn at the head of the electoral effort, Blair is now dependent on the re-entry of his successful chancellor to shore up his ragged campaign - and, indeed, to try to counteract the impression (encouraged by the recent chaos surrounding anti-terrorist legislation) that the Blair government is now a shambles.

Last Friday the bookmaker Coral was quoting odds of 14 to 1 on Labour to win the election - that is, you invest £14 to win one, and lose the lot if Labour loses. Those kind of odds should indicate what is known in the trade as a 'racing certainty.' But that is not what it feels like whenever one talks to real people, and Labour itself has been worried about its private polls. I have even heard of canvassers, after the usual dollop of criticism of Tony Blair on the doorstep, having to plead 'but we hope he won't be there for long'.

Labour are very worried about the 'stay at home' protest vote. 'You don't want the Tories, do you?' But people don't like being blackmailed into voting for a party led by someone they feel has let them down.

Amid all this, the Chancellor that Blair pushed aside is offering the country a choice. As his former economic adviser Ed Balls puts it in the current Tribune , 'Will the British people tolerate cuts in public services to pay for Tory tax cuts for a few? Or will they support Labour's service plans to keep investing to deliver economic prosperity, social justice and strong public services?'

Brown intends to emphasise that choice in this week's Budget. Unfortunately, he is up against the fact that many people do not wish to choose Blair. Meanwhile the Prime Minister is relying increasingly on the public's fear of terror to save him. What a prospect!