Tag: Ed Balls

The speech made by Ed Balls, the then Chief Economic Adviser to the Treasury, in Brighton on 12 June 2002.

INTRODUCTION

Let me thank you for inviting me to speak this morning at the start of what looks set to be a fascinating conference.

CIPFA is widely recognised as a leading independent voice on local government and public finance issues. And, under the leadership of your President Chris Hurford and Chief Executive Steve Freer, you are a highly valued partner for central government. Let me thank you today, on behalf of the Chancellor and the Treasury, for your work in leading the steering group which has drawn up the new Prudential Code on Capital Finance for local government, in helping smooth the introduction of Resource Accounting and Budgeting and in working towards the convergence of best practice accounting standards across the public sector.

These close ties are a sign of the value ministers place on this partnership with local government. Last year’s White Paper set out the next steps for that partnership. And I know that you will be hearing more on these issues this afternoon from the lead minister, Nick Raynsford, who is publishing the draft local government bill today.

As well as Nick, you have an impressive range of speakers for this year’s conference, with the Rt Hon Clare Short topping the bill tomorrow. I am glad that you have invited Derek Wanless, who did such an expert job on the Long-Term Health Review.

I am also pleased to be the warm-up act for my friend and colleague Geoff Mulgan. And, given this morning’s match, it is a great tribute to you all that so many of you have arrived on time.

There is a huge range of expertise here today from across the public sector – local government, public sector audit, the NHS, the police service, the Regional Development Agencies, the Competition Commission, the Environment Agency.

And I know – whether through tax, fiscal policy, accounting rules, financial regulation, public spending or the financial framework for local government – that the Treasury has a real impact – directly or indirectly – on the ability of you all to do the job you want to do.

The role of the Treasury is always controversial – no effective finance ministry can ever be universally popular. It is no surprise that Peter Hennessy – in his history of Whitehall – calls the Treasury “the most scapegoated department in the Whitehall constellation”.

But to the extent that that the old historical caricature of the Treasury as short-termist, centralising, secretive or miserly was ever deserved, I believe those days are gone.

So I am going to talk this morning about the role that the Treasury – a strategic and long-term Treasury – is playing in delivering the government’s long-term goals.

And, with the concluding phase of the Spending Review now under way, I want today to make the case that, in the spirit of Bank of England independence and the new approach to regional policy, we now need a new devolution – a new localism – in public service delivery that breaks with the short-termism of the past.

THE HISTORIC ROLE OF THE TREASURY

The Treasury is the oldest department in Whitehall, the collector of taxes for over 900 years.

And throughout the last century it was consistently unpopular. Keynes described the deflationary “Treasury view” of the 1920s as “the natural result of standing half way between common sense and sound theory: it is the result of having abandoned one without having reached the other.” And he parodied the “dead-hand” Treasury view as “you must not do anything because this will only mean that you can’t do something else”.

Indeed, when then historian Peter Clarke discovered in the archives from that period the Treasury’s copy of Lloyd George’s 1929 pamphlet ?We can conquer unemployment?, he found that a senior and anonymous Treasury official had defaced it with the words ?extravagance, inflation, bankruptcy”.

Consistently since then the Treasury was seen as an institution which had narrow objectives – low inflation, sound money, expenditure control; short-termist and peculiarly non-strategic – at its best in a crisis; centralising – jealous of its power within Whitehall and beyond; and secretive – protective of information and distant from the outside world

In his memoirs, Bernard Donoghue – then at the No 10 Policy Unit – describes lunch in 1974 following the OPEC oil shock with a “very senior Treasury official”. He asks why No 10 had been sent no Treasury papers on the threat of hyperinflation. The Treasury official replied: “politicians never deal with serious issues until they become the crisis, so at the Treasury we’re waiting till the crisis really blows up.”

Reputations earned are hard to be rid of. And fairly or not – and often criticism of the Treasury’s past record has been unfair – this “Treasury view” has often been used as the scapegoat for the series of economic policy failures that have plagued Britain in the post-war period. Short-term macroeconomic failures: the devaluations of 1949 and 1967, the Barber boom, the failure of monetarism in the 1980s and Britain’s 1992 exit from the exchange rate mechanism. And the failure to tackle historic long-term weaknesses: low productivity, inadequate skills, long-term under-investment in infrastructure and the public services.

THE NEW ROLE OF THE TREASURY

Gordon Brown as Chancellor of the Exchequer has set out his mission to lay to rest the Treasury’s traditional “dead-hand” image. As he said in a pre-election speech at the Manchester Business School, “a Labour Treasury will be both a ministry for finance and a ministry for long-term economic and social renewal”.

And with the leadership of our Permanent Secretary – soon to be the Cabinet Secretary – Sir Andrew Turnbull, the Treasury today is playing a new role in government in marked contrast to this historical caricature. The Treasury rightly prides itself on the quality, experience and hard-working nature of its staff, and under the leadership of Sir Andrew the department has been recruiting top-class graduates in record numbers. Anyone who doubts the commitment of the civil service to reform and adapt need only look at the management reforms that have been put in place at the Treasury over the last few years.

But this new role for the Treasury is not only a reflection of the wider ambitions of this government and this Chancellor to meet long-term economic and social goals: higher productivity, full employment in every region, the abolition of child poverty, and world-class public services. It reflects too, I believe, a proper understanding of the failures of the past and the new challenges of making policy in today’s world.

Let me illustrate with reference to the first and one of the most significant reforms of this government – the decision to make the Bank of England independent.

That decision, and sticking to inherited spending plans for the first two years, demonstrated that the new government and the Treasury were determined to make a decisive break with the short-termism of past Labour and Conservative governments.

But it was also a unique opportunity to learn from the failures of monetarism and the old rigid, secretive and centralised approach to macroeconomic policy-making.

The failure of monetarism – in the 1980s and then with the ERM – was to introduce rigidity into UK monetary policy making at just the time when the reality of global capital markets demanded greater flexibility.

In today’s global economy and fast-moving capital markets, responding flexibly and decisively to surprise economic events is critical for establishing a track record for delivering long-term stability. But without a credible framework that commands trust and a track record for making the right decisions, it is hard for policy to respond flexibly without immediately raising the suspicion that the government is about to sacrifice long-term stability and make a short-term dash for growth.

So in this new world of global capital markets, and building on the reforms put in place after 1992, we put in place a new and post-monetarist macroeconomic model based on “constrained discretion”. This new British model of central bank independence is an approach in which the government sets and is therefore constrained by the symmetric inflation target to stick to long-term goals; but because the institutional framework commands market credibility and public trust, the independent central bank has the discretion necessary to respond flexibly and transparently to economic events.

And, at the same time, we applied this model – where the public interest is pursued by devolving power to an independent agency charged with achieving clear long-term goals – to other areas of financial policy – establishing the Debt Management Office and the Financial Service Authority.

This devolutionary act belied the conventional prejudice that the Treasury is short-termist, secretive or controlling and jealous of its power. But this “constrained discretion” model of policy making has also had wider applicability across the public sector.

Because the old approach to policy where goals were not specified, lines of responsibility unclear, power guarded jealously at the centre and proper performance information concealed from the public, is no more appropriate for running a modern health service or delivering the best local public services.

As with macroeconomic policy, so effective public service delivery requires discretion for public service managers with the maximum devolution of power to encourage flexibility and creativity and meet consumer demands; but this discretion must be constrained by clear long-term goals and proper accountability.

Today it is simply not possible either to run economic policy or deliver strong public services that meet public expectations using top-down one-size-fits all solutions of the past. Because new information technologies, greater competition, a premium on skills and innovation, a wide-ranging media, increasingly demanding consumers, and varying local needs all work to expose the contradictions of old-style centralisation and a command and control approach to delivering public services.

So the principles which guide this new model of modern policy making are:

Clear long-term goals set by the elected government;

A clear division of responsibility and accountability for achieving those goals with proper co-ordination at the centre;

Maximum local flexibility and discretion to innovate, respond to local conditions and meet differing consumer demands;

And, alongside this devolution of power, maximum transparency about both goals and progress in achieving them with proper scrutiny and accountability.

Embracing this new approach to policy-making – this new localism – requires a very different Treasury.

Where the old caricatured Treasury had narrower objectives, today the Treasury has broader goals with a new mission “to raise the rate of sustainable growth and achieve rising prosperity through creating economic and employment opportunities for all”.

Where the old caricatured Treasury focused on short-term crisis management, the Treasury today sees its role as long-term and strategic.

Where the old caricatured Treasury was of an institution that wanted to suck power into the centre, the new Treasury wants to devolve power and responsibility with enhanced local discretion to take the initiative and be creative.

And where the old caricatured Treasury emphasised secrecy and control through non-disclosure, there is a new premium on transparency and openness as the route not just to greater accountability but also better policy outcomes and wider public trust.

I know that any speech from a Treasury official extolling the virtues of devolution will be met with a sceptical ear. And rightly so. Because the principles I will set out today are hard to put into practice. Change takes time. In some areas we have not gone far enough fast enough. The easy option is always to resort to the old ways on difficult issues. And there is sometimes a tension between the desire to devolve flexibility and encourage local innovation with the fact that, often, it is ministers at the centre who remain accountable to parliament and the public for fiscal stability, tax, value for money and performance, as with the public-private partnership for the tube. But to those people who remain sceptical about our motives, that this is the same old centralising wolf, I hope today to persuade you to think again. Let me do so by discussing productivity and regional policy, public spending and local government in turn.

PRODUCTIVITY AND REGIONAL POLICY

Our policies to promote productivity and full employment in every region of Britain are being shaped by this new approach to policy making.

Take competition policy, where we have now legislated to make individual competition decisions independent of ministers for both cartels and now complex monopolies. The DTI and the Treasury in financial sector cases remains responsible for the long-term goals of competition policy, for key appointments to the competition authorities and have the power to over-ride in exceptional circumstances. But on a day-to-day basis, with the goals of competition policy more clearly defined in legislation, decision-making has been devolved to the Office for Fair Trading and the Competition Commission who are now accountable to Parliament directly for case-by-case decisions making.

This new model, based on constrained discretion, is also guiding our approach to regional policy where, with the Deputy Prime Minister and the DTI, the Treasury has championed a greater role for strategic economic policy-making and policy innovation at the regional and local level.

The first generation of regional policy, before the war, was essentially ambulance work getting help to high unemployment areas. The second generation in the 1960s and 1970s was based on large capital and tax incentives delivered by the then Department of Industry, almost certainly opposed by the Treasury. It was inflexible but it was also top-down. And it did not work.

The new approach to regional economic policy, wholeheartedly promoted by the Treasury is based on two principles – it aims to strengthen the long-term building blocks of growth – innovation, skills, the development of enterprise – by exploiting the indigenous strengths in each region and city. And it is bottom-up not top-down, with national government enabling powerful regional and local initiatives to work by providing the necessary flexibility and resources.

This new regional policy is based on a genuine devolution of power in economic policy making to the Regional Development Agencies – with expanded budgets and – just as important – the “single pot” with 100% flexibility, including full EYF, to spend these resources to meet regional priorities.

This “single pot” is a radical departure for central government. It is requiring a big culture change. For central government departments? role is long-term and strategic rather than short-term and micro-managing. But also a culture change in the regions as this devolution requires other regional and local economic players – the Learning and Skills Councils and the Small Business Service as well as local government – to work as part of the RDA regional strategy.

In return for this devolution of power and discretion in decision-making we have demanded greater transparency and accountability. Each RDA has been required to agree stretching and long-term output targets with national government for the years ahead. Not, as we have repeatedly reminded Whitehall departments, as a backdoor way to regain control but so that each RDA is held properly to account by the national taxpayer but also within the region and by local government.

Strengthening this new regional economic policy – with further support for the RDAs to promote enterprise and job creation in the regions – is a priority for the Spending Review.

For the first time this Review will be based on a wider collection of regional needs and priorities. The RDA and the Government Office in each region have already submitted a Regional Priority Document to the Treasury. And we will publish greater information on the regional impact of the Spending Review to meet our productivity goals.

But enhancing the role of the RDAs is not only about resources. We must also ask how we can effectively harness the new strategic leadership of the RDAs and make better co-ordinated policy in the regions across a range of areas where public spending impacts on regional economic strategies – planning, skills, transport and housing.

To ensure proper regional and local accountability, the Deputy Prime Minister and the Chancellor last year allocated £5m to fund the eight Regional Assemblies outside London. Last month, the Deputy Prime Minister’s White Paper set out the detailed route map for those regions that want to go further and move to elected regional assemblies. And the Treasury has worked closely with the Deputy Prime Minister and the Cabinet Office to draw up a package of further financial freedoms and flexibilities to match greater accountability.

FISCAL POLICY AND PUBLIC SPENDING

The principles underpinning this new approach – clear long-term goals, a strategic centre, effective devolution matched by transparency and accountability – are also guiding the Treasury’s approach to fiscal policy and public spending.

Since 1997 the Treasury has introduced and stayed with the same two long-term fiscal rules defined over the economic cycle. We have enshrined in legislation a Code for Fiscal Stability to codify in law the Treasury’s fiscal obligation and responsibilities. And while devolution of the management of the public finances and tax policy would not make sense, we have enhanced openness and transparency in fiscal policy-making, with key fiscal assumptions audited by the independent National Audit Office. It is this credible commitment to fiscal discipline that is enabling us to release record new resources to invest in the NHS and public services.

At least as radical have been the changes that the Treasury has introduced in public spending planning and control since 1997 – one area where the old caricature clearly bears a resemblance to the truth.

It is now widely recognised that the ideals of the Plowden approach, that set out to guide public spending decisions from the 1960s, were progressively eroded over the next two decades. This left a public spending regime that was short-termist, with annual budgeting and no distinction between current and capital spending which meant that long-term capital investment was too often sacrificed to meet short-term current pressures.

It was ad-hoc and incrementalist with the centre of government paying too little attention to the need to coordinate between departments.

Departments were not devolved the necessary freedom to plan properly, with no certainty about the following year’s budget, no End-Year Flexibility to carry forward under-spends and central control over public sector pay.

And, worst of all, it emphasised controlling inputs rather than delivering outputs with no proper attempt to be accountable to the public for outcomes.

The new approach to public spending, introduced since 1997, makes it possible to plan for the long-term with a clear distinction between current and capital spending as we steadily tackle the backlog of under-investment.

Spending decisions are based on in-depth policy review, not simply on last year’s figures, and informed interdepartmental reviews to strengthen co-ordination across government.

We have devolved spending power to departments with a three-year not one-year cycle and there is full End Year Flexibility for departments to move their budgets from one year to the next. With the introduction of Resource Accounting and Budgeting, departments will have greater freedom to manage their assets properly.

And, most important, it is results-driven with targets for outputs set out in the Public Service Agreements which the Treasury agreed with each department as part of the 1998 and 2000 Spending Reviews – with floor targets to raise the performance of below average services and tackle inequalities in all the main public services – education, health, transport and crime.

The introduction of PSA targets in the 1998 Comprehensive Spending Review was the most ambitious attempt internationally to set explicit goals for outcomes across the whole of Government.

Some have interpreted the introduction of PSAs and output targets as an increase in Treasury interference and control. I disagree. We have rightly moved away from the old days when the Treasury signed the cheques or had to approve each and every spending project.
The Treasury does work closely in partnership with a range of departments in the development of economic policy. But far from being a way of pulling power into the centre, PSAs are the constraint which allows effective and accountable devolution and discretion for departments. And making a reality of this devolution requires government to cascade these targets and financial flexibilities down from departments to front-line mangers instead of the old input controls of the past – and here progress has not been always as fast as it could have been.

The resources and reforms announced for health in this year’s Budget chart the way forward. The Treasury has agreed a five year budget with the department and full End-Year-Flexibility. The Department of Health and the NHS Executive are the strategic centre, setting objectives and shaping incentives. There is growing devolution of money, multi-year budgets and flexibility down to Primary Care Trusts and hospital Trusts, with money increasingly following patients. And there will also be new, tough and streamlined audit and inspection with two national regulators for health and social services with an annual report to Parliament and local reporting. Because the public has a right to know how their money is being spent and that spending and reform are being combined to deliver outputs.

The role of Cabinet and Cabinet Committees, working with the Cabinet Office, the Treasury and No 10 – and increasingly central government departments too – should not be to direct and control the detailed delivery of services. It should be to create a framework in which local public service deliverers have the discretion to innovate and improve the services they provide, constrained by the need to reach high minimum standards. That is why, since the last election, the Delivery Unit in the Cabinet Office, working very closely with the Treasury, has assessed the strategic capacity of each main department to meet key PSA targets by incentivising good performance in local service delivery, working with the private and voluntary sectors where appropriate. And the Office of Public Service Reform, also in the Cabinet Office under the leadership of a former local government Chief Executive, Wendy Thomson, has also been developing this approach since last year.

This philosophy is guiding our approach in this year’s Spending Review, now in its final phase. And we are again breaking new ground.

In the 2000 Spending Review, we took the opportunity to improve the structure of the Government’s objectives and set more streamlined PSAs covering the additional expenditure and focusing harder on the things that really matter, with fewer targets, better focused on the important issues, and with data systems audited by the NAO.

For the first time in this review, we are able to assess spending strategies in the light of performance to date against existing PSA targets. Which means that, the process of matching money with reform is being done in the light of experience of which reforms so far have worked and which have failed to meet expectations.

Most important, in this Spending Review – working with hospitals, schools, police forces, transport and housing – the government is determined to go even further in matching money with reform through clear long-term targets and national standards and proper audit and accountability to ensure standards are met, combined with a new localism in public service delivery – greater local devolution, greater flexibility to achieve greater results and greater choice for consumers.

LOCAL GOVERNMENT

Let me turn finally to local government. Just as we made a start with regional policy in the last Parliament we also made a start in devolving power to local government, moving away from the destructive centralism characteristic of the years marked by universal capping, strict limits on borrowing and then the Poll Tax.

The old caricature of the Treasury was of a department which – because of its desire to centralise power – was hostile to local government and to devolving real financial flexibility and accountability. I do not believe that this reputation is entirely fair.

But, as in regional economic policy, so in local service delivery, a proper strategic division of responsibilities requires us to recognise that Whitehall does not know best – that effective service delivery for families and communities cannot come from central command and control but requires local initiative matched by local accountability. And with the Deputy Prime Minister John Prescott in the lead on local government issues, I can assure you that you have powerful champions across Whitehall.

So to build a long-term and strategic partnership between central and local government, this government has devolved resources and flexibility and boosted financial support for councils, through real terms increases in revenue and in capital expenditure for four years.

We have matched devolution with greater accountability with new constitutions for local government following local consultation and expanded the capacities of local government by introducing statutory community strategies produced by local partners.

And we have developed Local Public Service Agreements, which match resources and greater flexibilities to outcome targets. And as we increase the number of local PSAs from 20 local authorities last year to the top-tier 150 by 2003, we will match them with further steps towards greater flexibility: flexibility and resources in return for reform.

The White Paper last December set out new reforms that will significantly expand the freedoms and flexibilities available to local government and we have made good progress since then.

There is not time today for an exhaustive list. But as you know, in addition to consulting on providing greater freedom for all councils to decide council tax discounts and exemptions, we intend to legislate for further freedom to use income collected locally from charges, we are making progress in Whitehall in identifying unnecessary bureaucracy to achieve the target of a 50 per cent reduction in the numbers of plans and strategies that government requires councils to produce and we are focussing on the difficult issue of ring-fencing as part of the Spending Review. And you know too that we intend to make councils themselves responsible for deciding how much they can prudently borrow. I know CIPFA are playing a leading role in drawing up the prudential guidelines for controlling capital investment. This will provide greater freedom for councils to invest. But it will also place more responsibility in the hands of individual councils to manage their own affairs – real financial flexibility in a prudent framework.

Based on the same principles of constrained discretion high performing councils will receive extra freedoms to lead the way to further service improvements. For these councils, we will not use our reserve powers to cap council tax increases, as a first step towards our long term goal of dispensing with the power to cap altogether; we intend to legislate for new powers to free up councils to trade and work in partnership; we will grant more discretion over best value review programmes; and introduce a much lighter touch inspection regime.

Decisions about high performing authorities will be based on the new comprehensive performance framework for local government – currently being piloted with 10 pathfinder areas. CPA will provide clear and concise information about councils’ performance, enabling us to make our inspection regimes more proportionate, to target support where it is most needed, to identify the small minority of failing councils in need of tough remedial action. It is also key to allowing us to go further with freedoms and flexibilities for councils.

As the Chancellor said at the end of last year following the publication of the White paper, we are ready to go even further to enable local people to do more to make local decisions about meeting local needs and consider further radical options to ensure devolution of power and responsibility go hand in hand so that the public can get the best possible services. And once we have carried out further analysis, we shall establish a high level working group involving ministers and senior figures from local government to look at all aspects of the balance of funding, reviewing the evidence and looking at reform options.

CONCLUSION

In conclusion, I believe that we have moved beyond the old caricature of the Treasury as the department that likes to say no – reactive, short-termist, centralist and secretive – to a new long-term model for British economic policy based on clear and long-term objectives, devolution of power and transparent mechanisms for accountability. It is a new model – with power devolved to those best placed to make expert decisions to meet national goals and standards – that we are already applying from monetary and fiscal policy to financial service regulation, competition and regional policy and the new financial regime for local authorities – and we must now go further in the Spending Review with a new localism in public services.

This new model requires – as the Prime Minister’s pamphlet on public service reform says – “a genuine partnership between government and the people in the front line.”

The Treasury is committed to working in partnership – with departments, with the regions and local government. Because, as the Chancellor of the Exchequer said in his speech to the Local Government Association last December, it is only by national and local government working together – matching devolution and accountability – that we can hope to meet our shared long-term goals, creating a more enterprising economy and a fairer society.

Thank you.

The speech made by Ed Balls, the then Chief Economic Adviser to the Treasury, at Merchant Taylor’s Hall in London on 12 June 2001.

INTRODUCTION

It is a great pleasure and a privilege to be invited here today to give the first Oxford Business Alumni Annual Lecture.

The last four years have been a dramatic and exciting period of change – both for the Said Business School and for British economic policy.

Oxford University’s Business School has been transformed from a concept in 1990, its first MBA programme in 1996, to a fully-fledged School with 100 MBA students from some 30 countries and over 1,000 alumni.  With its first graduates now established in the business world, I congratulate the School and its alumni for its deserved reputation as a centre for dynamism and excellence in the application of ideas to business and commerce.

The institutions and practice of British economic policy have also undergone radical change.  The new Competition Commission and strengthened Office of Fair Trading enacting new competition legislation.  The Financial Services Authority regulating financial services.  A network of Regional Development Agencies implementing a new and decentralised industrial policy.  Three year budgeting for central and now local government.  A new framework for fiscal policy based on greater transparency and clearly defined fiscal rules over the cycle, enshrined in legislation in the Code for Fiscal Stability.

And, above all, a reformed Bank of England granted, de facto, operational independence to set British interest rates on this very day of the political calendar – the Tuesday following the 1997 general election.

The decision to go for immediate independence fulfilled the Manifesto commitment to “reform the Bank of England to ensure that decision-making on monetary policy is more effective, open accountable and free from short-term political manipulation”.  From the moment that the new Chancellor of the Exchequer, Gordon Brown, first told the Permanent Secretary to the Treasury of his intentions at their first meeting after the General Election and handed him the draft letter to the Governor of the Bank of England, a small Treasury team remained locked in the office throughout the Bank holiday weekend to prepare the announcement.  All of us knew that this was a very major institutional change – for the Treasury but also for the Bank – over-turning decades of practice and tradition.

It is also a very significant constitutional change – a Chancellor and a government choosing to cede such a significant power as setting national interest rates to an unelected agency of UK government.  In the words of the Times the next morning: “the most fundamental shake-up of the Bank of England since its formation nearly 303 years ago.”

But, most important, it was – as the House of Lords Select Committee concluded two years later – “a radical new departure in economic policy-making” – establishing a new and distinctive British model of central bank independence.

Different countries and regions have chosen and succeeded with different routes to stability, depending on their economic circumstances, history and traditions. For Britain in 1997 we needed a new route to stability and a new model of central bank independence.  A model suited to a medium-sized open economy in a fast-moving open global capital market and with a strong tradition of parliamentary and, through the media, public accountability in economic policy-making, but also a country with a recent track record of instability and economic failure.

In this lecture I want to set out in more detail the background to this decision, why we felt central bank independence was the right route to stability for Britain and why changes in the global economy and the history of economic policy-making in Britain led us to choose the particular model and design features of the new British model of central bank independence.  And I will then take a look, at this still early stage, four years, four weeks and one general election later, at whether this model is delivering a credible, flexible and legitimate platform of stability for Britain.

THE POLITICAL ECONOMY OF INDEPENDENCE

Why did the new Labour government decide to move so quickly and decisively to establish the independence of the Bank of England in May 1997?

Some argue that the Labour government would have been forced to do it anyway, and so tried belatedly to take the initiative.  But there was no expectation either in the Treasury, the Bank or indeed in the wider business or financial communities that the government would decide to opt for statutory independence.

A second mistaken view is that independence would allow a new Chancellor to duck responsibility for difficult decisions. In fact, interest rates were raised immediately by Gordon Brown. But we also knew that the Chancellor who made the Bank independent would necessarily be held responsible for the subsequent economic record, albeit with less ability to directly influence it month by month. A number of former Conservative Chancellors had become advocates of independence in their memoirs.  But none ever felt either sufficiently pressured or sufficiently brave to take the plunge while in office.

Nor was it an admission of impotence in the face of global financial markets – confirmation that national governments no longer have the power to make their own decisions about economic policy.  Yes, governments which pursue unsustainable monetary and fiscal policies are punished hard these days – and much more rapidly then thirty or forty years ago.  But the evidence of the past decade is that governments which are judged to be pursuing transparent and credible policies can attract inflows of investment capital at a higher speed, in greater volume and at a lower cost than ever before.

A final mistaken view is that independence could avoid the potential for conflict between a new Labour chancellor and the Governor of the Bank of England.  It is true that the personalised “Ken and Eddie” monthly meeting had already become destabilising and unsustainable.  One did not have to anticipate a return to the days or Wilson, Callaghan and Lord Cromer to see the potential for media mischief with a new Chancellor.  It was a deliberate decision to move to independence straight after the first  – and thus last -old-style meeting between the Chancellor and Governor.  But the model of central bank independence we chose demands a continuing close relationship between the Chancellor and Governor.  And, in practice, to my mind, that relationship has become very close over the past four years by historical standards.

There were three reasons, in my opinion, why central bank independence was the right policy for Britain in 1997.

First, it demonstrated that the new government was determined to make a decisive break with the short-termism of past Labour  and Conservative governments.  It demonstrated a clear and unambiguous commitment to a new long-termism in British economic policy-making.  As with the two year freeze in public spending, handing over the short-term fine-tuning of the economy to a group of experts was an emphatic demonstration that this government was not looking for short-termist quick fixes or to duck difficult decisions.  It had a decisive impact on both the international reputation of the government and on the wider credibility of Treasury Ministers.

Second, central bank independence liberated the Treasury.  There is no doubt to my mind, talking to colleagues, that setting interest rates, and all the short-term activity which came with that task, took at least half of the time and energy of past Chancellors, as well as being a monthly source of disagreement between No 10 and No 11 Downing Street. Since independence there has been – as the Treasury Permanent Secretary Sir Andrew Turnbull told the House of Lords select committee investigation – “a change of time horizon” at the Treasury. Handing over the short-term task of monthly decision-making on interest rates – to meet a target set by the government – has created the time, space and long-term credibility for the Chancellor, and senior Treasury management, to concentrate on all the other levers of economic policy and the government’s long-term economic objectives.

For the Chancellor’s first words at the 1997 press conference were to restore, as the goals of economic policy, the 1944 white paper aims of high and stable levels of growth and employment.  We knew these objectives had radical implications across the widest range of government economic policies.  But stability alone could not by itself deliver full employment, higher living standards, better public services to tackle child poverty.  It is the reforms to enterprise, competition and productivity, employment policy and the welfare state, tax and public services – in the last parliament and in this new parliament – which will determine the government’s abilities to meet its long-term economic and social goals.

But to achieve those long-term goals, and after the instability and short-termism of past decades, we knew that building a stable economy and a credible and forward-looking macroeconomic policy – with no deflationary bias – was an essential first step.  So the third – and most important – reason for the early move to independence was that it provided a unique opportunity to reshape the objectives, institutions and practice of British macroeconomic policy.

After the violent boom-bust economic cycles of the past twenty or so years, any threat of a return to renewed short-termism and instability in macroeconomic policy-making would have quickly undermined any chance of focusing on long-term supply-side reform or establishing for business and public services a credible platform for long-term investment.

A change of government provided a unique opportunity to learn from that history and changes in the global economy and establish a modern, pro-stability but post-monetarist macroeconomic framework for Britain.

BRITISH INSTABILITY AND THE FAILURE OF MONETARISM

The search for credibility had also prompted a change in economic direction when the government had last changed hands in 1979.  For by the mid and late 1970s, with unemployment and inflation both rising and the old idea of government fine-tuning a long-term trade-off between unemployment and inflation dead, reform was needed.

But the new government, following a combination of IMF advice and a rigid application of the views of US economist Milton Friedman, took a hard-line monetarist direction.  The monetarist route to credibility was to tie the government’s hands and remove discretion from policy-making. It did so by relying on a stable relationship between the growth of the money supply and inflation and by pre-committing the government to set interest rates to control money growth.

The problem was that – in the face of global financial integration and deregulation – what had seemed to be a stable relationship between money and inflation was collapsing.

Persisting with these fixed rules, as monetary aggregates ran out of control, proved disastrous.  Because with its credibility at stake, the government was forced to continue with a deflationary policy of high interest rates and high exchange rate, in a continuing attempt to meet its monetary targets.  Attempting to achieve stability and low inflation by clinging doggedly to a series of intermediate indicators now implied perverse policy mixes – first highly deflationary, then grossly inflationary in the mid to late 1980s and then deeply deflationary again.

But because the government had staked its anti-inflationary credentials on following these rules, it was faced with paying a heavy reputational price for breaking them.  As one money rule after another proved unsustainable and was replaced by the next, the government’s anti-inflationary credentials and commitment weakened and politics increasingly drove policy-making with little transparency or effective justification or explanation about policy decisions or mistakes.

Nor did the attempt to shore up credibility through the exchange rate prove a better alternative.  Nigel Lawson’s destabilising flirtation with exchange rate targeting in 1987 and 1988, during which period the objective of UK monetary policy became damagingly ambiguous, was followed by the debacle of Britain’s membership of the Exchange Rate Mechanism which again had monetarist undertones – this time hoping for stable relationship between the exchange rate and inflation which did not exist.  The result was a second deep recession in decade, leaving the credibility and legitimacy of British macroeconomic policy-making badly damaged.

The failure of monetarism as a macroeconomic doctrine was not its rejection of old-style fine-tuning or its desire to achieve long-term credibility in policy-making. Its failure was to introduce a rigidity into UK monetary policy-making at just the time when the reality of global capital markets demanded greater flexibility – with disastrous deflationary and destabilising consequences.

Things did improve after sterling’s exist from the ERM in 1992 – in particular the shift to inflation targeting and publication of minutes of a monthly discussion between the Chancellor and the Governor.  But they did not constitute a credible and sustainable approach.

Decision-making remained highly personalised, the inflation target was ambiguous and deflationary and – as we concluded in the Treasury’s recent assessment of the old and new systems – “policy-makers operated behind closed doors and decisions were often made with little or no explanation”. Most problematic, the suspicion remained that policy was being manipulated for short-term motives.  As Deputy Governor Mervyn King concluded in 1999, “long-term interest rates contained a risk premium that the timing and magnitude of interest rate changes might reflect political considerations.” Long – term interest rates remained 1.7 percent higher in Britain than in Germany while, despite the commitment to an inflation target of 2.5 per cent or less, financial market expectations of inflation 10 years ahead remained at 4.3 per cent in April 1997, and never fell below 4 per cent for the whole period, while by the time of the 1997 election the Treasury was forecasting inflation was forecast to rise above 4 per cent over the coming year.

CREDIBILITY, FLEXIBILITY AND LEGITIMACY

A decisive change in direction was needed to rebuild credibility and trust. The change of government in 1997, and the decision to opt for an independent central bank, provided the opportunity.  We needed a new British macroeconomic framework which could meet three central objectives:

First, Credibility.  We needed a policy framework in which the government’s commitment to long-term stability – low inflation and sound public finances – commanded trust from the public, business and markets. For a new government, especially for a left of centre government out of power for twenty years, establishing credibility was a must.

Second, Flexibility.  We needed a framework within which policymakers could take early and forward-looking action  – in monetary and fiscal policy – in the face of the ups and downs of the economic cycle without jeopardising the credibility of those long-term goals.  And we needed the flexibility to strike and sustain the right balance between monetary and fiscal policy.

And third, Legitimacy.  The new framework had to be capable of rebuilding and entrenching public support and establishing a new cross-party political and parliamentary consensus for long-term stability.  A new consensus about goals – delivering low and stable inflation and supporting the government’s wider objectives for sustainable growth and employment  – without the old deflationary mistakes. But also a new consensus about institutions so that policymakers would be able to take difficult decisions, when necessary, in the public interest.

These objectives were and are closely related.  Responding flexibly and decisively to surprise economic events is critical for establishing a track record for delivering long-term stability without huge swings in inflation, output or unemployment.  But without a credible framework which commands trust and a track record for making the right decisions, it is hard for policy to respond flexibly without immediately raising the suspicion that the government is about to sacrifice long-term stability and make a short-term dash for growth.

And British economic policy-making was effectively starting from scratch in establishing reputation and public trust.  As the Chancellor of the Exchequer set out in his 1999 Mais lecture, in this new world of global capital markets, we needed a new post-monetarist model – a model based on what I described in a lecture to the Scottish Economic Society in 1997 as “constrained discretion”.  An approach which recognises that the discretion necessary for effective economic policy – short-term flexibility to meet credible long-term goals – is possible only within an institutional framework that commands market credibility and public trust with the government constrained to deliver clearly defined long-term policy objectives and maximum openness and transparency.

DIFFERENT ROUTES TO STABILITY

Of course, there is more than one route to stability for countries and regions – and different successful models of central bank independence – depending on their history, institutions and track record.  For Britain, the government’s commitment, in principle to membership of a successful single currency, provided the five economic tests demonstrate that membership is in the national economic interest and the cabinet, parliament and the people agree in a referendum, directly demonstrate this government’s understanding that, in principle, Euro membership could be an alternative and valid route to stability for Britain.

In the US, Alan Greenspan has established huge credibility through his track record of monetary policy-making and his stress on transparency. And this credibility has allowed the Federal Reserve to maintain great policy flexibility without setting explicit targets for monetary policy – either for inflation or any other intermediate targets.

The Bundesbank also had a highly successful history.  Credibility established over a 50 year track record of stability.  Flexibility, because this long-term credibility enabled the Bundesbank to regularly turn a blind eye to its publicly announced money supply targets.  And legitimacy which grew from the apolitical almost anti-political approach to monetary policy-making shared by the Bundesbank, the government and German people following the hyperinflation of the past and the subsequent post-war success of the German economy – and which continued despite the Bundesbank’s tendency to surprise the markets and its cautious approach to transparency.

The drafters of the Maastricht treaty had this Bundesbank model at the centre of their thinking when they established the European Central Bank. But legal independence from political interference is only part of the story.  The fundamental question the Treaty designers had to decide – and which the ECB’s track record will establish – is whether the ECB could inherit the credibility and reputation of the Bundesbank or whether, like the UK, it was starting from scratch in building a reputation for long-term stability.

The old Bundesbank-style approach would not have worked for Britain in 1997. Because it is only when there is already a long-established track record and tradition of successful stability-orientated policy-making that objectives do not need to be clearly set or decisions made in an open and transparent fashion. The UK had no such tradition.

THE NEW BRITISH MODEL

That is why we concluded that we needed a new approach for Britain in 1997 – and a new model of central bank independence. Macroeconomic policy could not hope to command credibility,  retain flexibility and rebuild legitimacy without a clearly defined long-term targets, proper procedures and a commitment to transparency and accountability.  Because to combine long-term credibility and short-term constrained discretion to respond flexibly in the face of economic shocks would only be possible if policy-makers were seen in practice to be genuinely pre-committed to delivering long-term stability and could build a track record for doing so.

The new British model has five key features:

• a strategic division of responsibilities:  with the elected government setting the wider economic strategy and the objectives for monetary policy, while monthly decisions are passed over to the central bank, thereby pre-committing the government to long-term stability;
• a single symmetric inflation target:  with no ambiguity about the inflation target, no deflationary bias and no dual targeting of inflation and the short-term exchange rate;
• independent expert decisions:  with monthly decisions to meet the government’s inflation target taken by an independent Monetary Policy Committee made up of the Governor, four Bank executives and four outside experts appointed directly by the Chancellor;
• built-in flexibility:  with the Open Letter system to allow the necessary flexibility so that policy can respond in the short-term to surprise economic events without jeopardising long-term goals and proper procedures to ensure proper co-ordination of monetary and a medium-term fiscal policy;
• maximum transparency and accountability: with monthly minutes published and individual vote attributed and with a strengthened role for parliament – so that the public and markets can see that decisions were being taken, within a legitimate framework, for sound long-term reasons and in order to support the government’s wider objectives for living standards and employment. I will discuss these features in turn.

First, a strategic division of responsibilities between the Treasury and the Bank of England – with the Chancellor  responsible for what Governor Eddie George labeled in his 1997 Mais lecture the “political decision” of setting the target and the MPC responsible for the “technical decision” of achieving it. This was a clear change from the normal model of central bank independence.  The Federal Reserve, Bundesbank and the ECB are all “goal independent” – charged in legislation with delivering price stability but also responsible for defining the precise target for policy as well as making monthly decisions to meet that target.

Why did we opt for operational independence?  Partly, as I will discuss in a moment so the Chancellor could introduce a new and non-deflationary inflation target.  But also to strengthen the  legitimacy of the unelected MPC in making monthly interest rate decisions by emphasising that its pursuit of stability was an important part of the government’s wider economic strategy to deliver high and stable growth and employment.

As Deputy Governor Mervyn King said in his 1999 Belfast lecture, “the rationale for handing operational responsibility for setting interest rates to the MPC is that it is better qualified to make those decisions than elected politicians, whereas elected politicians have the democratic legitimacy to choose the target.”

Some feared that this would lead to a less credible central bank. And it is, of course, entirely open to the government of the day to set a higher target for inflation, indeed – with the support of parliament – to suspend or even reverse independence entirely.  But in the absence of a long-term trade off between higher inflation and higher unemployment, there would be nothing to gain and everything to lose from setting a weaker target.

Far from being a weakening of independence or a failure to be bold, I believe that our decision to have the government set the target was, in fact, a more radical approach which strengthened the independence of the central bank.  For having set the target for the central bank, it is very hard for the government to question the decisions of the MPC.  To doubt their decisions is either to doubt that the target is wrong, which is not their fault, or doubt their expertise which is hard for the government to do, especially if it has appointed the experts itself.  Instead, the incentive for the government of the day is publicly to back the MPC’s decisions.  And from the central bank’s point of view, as well as having the government firmly alongside it in making sometimes controversial decisions, it is able to spend its time each month debating how best to meet the inflation target rather than debating and disagreeing over what price stability should mean in practice.

At no time has the government ever cast any doubt about the wisdom of the MPC’s individual decisions.  Indeed, while backing their strategy in public speeches, this Chancellor has been careful to avoid ever commenting on individual decisions – although the Treasury publicly reviews the MPC’s performance against the target. As Eddie George said in that 1997 lecture, this division of responsibilities ?helps to ensure that the Government and the Bank are separately accountable for their respective roles in the monetary policy process.?

The second reason why we wanted the government to set the target was so that we could move from an asymmetric to a single symmetric inflation target.  And that we did in June 1997, changing from the ambiguously defined inflation target we inherited of 2.5 per cent or less to a clearly and symmetrically defined inflation target of 2.5 per cent.

I said earlier that our commitment to stability rested on a rejection of the old idea that there was a long-run trade-off between unemployment and inflation.  But the rejection of the old-style fine-tuning means recognising that there is no long-term gain to be had either from trying to trade higher inflation for more output or jobs or lower inflation at the cost of output and jobs.

A stable and symmetric target is the best guarantee of a pro- stability and pro-growth policy.  It requires that deviations below target are taken as seriously as above – removing the old deflationary bias of the ?2.5% or less? target which makes 2% better than 2.5% and 1% better than 2%, regardless of the impact on output and jobs.  It is the key innovation in the new model which ensures that monetary policy supports the government’s goals for high and stable levels of growth and employment.

As the Governor of the Bank of England, Eddie George, said to the TUC Congress in September 1998:

?The inflation target we have been set is symmetrical.  A significant, sustained, fall below 2 1/2% is to be regarded just as seriously as a significant, sustained, rise above it.  And I give you my assurance that we will be just as rigorous in cutting interest rates if the overall evidence begins to point to our undershooting the target as we have been in raising them when the balance of risks was on the upside”.

In our internal discussion at the Treasury in the Spring of 1997, some feared that dropping the aspiration to lower inflation than 2.5 per cent would damage the credibility of UK monetary policy.  I believe that the role of the symmetric target as the sole target for monetary policy has been critical in enabling the MPC to be both credible and flexible.  A symmetric target gives much great clarity – making it more straightforward for the MPC to justify publicly its decisions and be held to account for its record.  But, importantly, it has ensured that the MPC takes a forward-looking, as well as symmetric, view of the risks to the British economy.  If inflation is forecast to fall below 2.5 per cent the MPC does not wait to see how far it will fall but instead responds to get inflation back to target.

The setting of the symmetric target, by the government, as the sole target for monetary policy, with the Treasury also responsible for exchange rate policy and intervention, has also removed any suspicion that the government might be trying to target the exchange rate as well as inflation. For in an open economy like Britain, with open capital markets, successfully trying to run dual targets for inflation and the exchange rate is flawed in theory and has proved destabilising in practice.  Britain’s economic history suggests that trying to deliver exchange rate target can only be achieved at the expense of wider instability – in inflation and the wider manufacturing and service sectors.

As the Chancellor has said, the government understands the difficulties that the current high level of sterling has caused.  But any short-term attempt to manipulate the exchange rate, overtly or covertly, would put both the inflation target and – as in the late 1980s – wider stability at risk.  The objective of UK monetary policy is and remains clear and unambiguous – to meet a symmetric inflation target of 2.5 per cent.  The Government’s objective for the exchange rate remains a stable and competitive pound in the medium term.  But there is no short term exchange rate target competing with the inflation target.

The third new departure to achieve independent expert decisions was the establishment of the new Monetary Policy Committee – a reform which at a stroke put behind us the old personalised approach to policy-making we had seen in the 1980s.  The role of the chancellor in appointing the four outsiders was, in my view, part of the delicate constitutional balance we were striking in moving to a legitimate model of central independence consistent with British-style ministerial accountability to parliament.

Some, I am sure, doubted whether our commitment to appoint genuine and independent experts was real.  The quality and independence of all the appointments speak for themselves.  Importantly, they have demonstrated that it is perfectly acceptable and desirable for independent experts to disagree in public over difficult monetary policy judgments.  Should the outside appointments have had longer terms than three years or, as Willem Buiter argued, serve only one term?  Perhaps. Although, over the first four years of the MPC’s life, it would have made no difference.  It is hard enough to get experts to commit to leave their posts for three years.  And no issue of appointment or re-appointment has been influenced in any way by past voting behaviour.

The fourth departure in the new British model is the built-in flexibility to allow the MPC to respond flexibly in the face of economic shocks and to allow an effective co-ordination of monetary and fiscal policy.

The first of these is the Open Letter system.  If inflation goes more than one percentage point either side of 2.5 per cent, the Governor is required to write to the Chancellor, on behalf of the MPC, explaining why it has happened, what the MPC has done about it, how long it will take for inflation to come back to target and how the MPC’s response is consistent with the government’s economic objectives – both for price stability and high and stable levels of growth and employment.

The Open letter system has not yet been used, confounding the fears of some that it would be used many times.  I believe its importance has not been properly understood.  Some have assumed it exists for the Chancellor to discipline the MPC if inflation goes outside the target range. In fact the opposite is true.  In the face of a supply-shock, such as a big jump in the oil price, which pushed inflation way off target, the MPC could only get inflation back to 2.5 per cent quickly through a draconian interest rate response  – at the expense of stability, growth and jobs.  Any sensible monetary policymaker would want a more measured and stability-oriented strategy to get inflation back to target. And it is the Open Letter system which both allows that more sensible approach to be explained by the MPC and allows the Chancellor publicly to endorse it. In this way, transparency and accountability have the potential to make it easier for the MPC to be flexible when necessary without risking its long-term credibility.

Nor has the new system led to a less flexible approach to the co-ordination of fiscal and monetary policy.  In fact, monetary and fiscal policy are much more co-ordinated now than they ever were when the sole decision-maker was the Chancellor for both interest rates ands fiscal policy.  Partly because the Treasury representative explains the fiscal strategy to the MPC regularly, and in particular at the meeting before each Budget, on the basis of clearly defined fiscal rules set over the economic cycle.  But more importantly the MPC is free – in a transparent way – to respond with interest rates to fiscal policy.  So, in preparing the Budget, the Treasury knows that it will be judged both in terms of its medium-term fiscal rules and what the MPC does and says in its Minutes about fiscal policy.  There is no way, as in the past, that the Chancellor can any reward him or herself with an interest rate cut the day after the Budget as happened on numerous occasion in the past.

Central to the discussion of each of these reforms is maximum transparency and accountability.  And that means transparency of both objectives and process – what goals the government is trying to achieve, how the target for monetary policy is being set to help meet those goals and how decisions are being made in order to achieve them.

The most important transparency mechanism is the publication of the minutes of the MPC’s monthly meeting which not only sets out in detail the reasoning behind the decision but also sets out the range of views within the MPC and – critically – publishes the votes of named individual members. It is this transparency in published voting records which has done so much to deepen public understanding of the nature of monetary decisions.  The fact that independent experts, publicly accountable as individuals for the decisions, are seen to change their minds when the evidence changes has deepened legitimacy but also demonstrates that the MPC’s flexibility and forward-looking approach is in pursuit of a credible commitment to the inflation.  This innovation, with the minutes now published two weeks after the meeting – consistent with the ‘within 6 week’ formulation of the legislation – has contributed greatly to a much more mature debate in Britain about genuinely difficult monthly decisions.

Some have argued that the particular arguments and views in the minutes should be attributed.  From the outside, this seems to me mistaken.  The strength of the meeting at present is that there is a genuinely open debate which the minutes reflect but which allow MPC members to be persuaded by argument.  Attributing argument to individuals would quickly lead to members reading prepared texts in the minutes at the expense of flexibility in decision-making and the genuinely deliberative nature of the meeting in which people can change their minds and be influenced by the debate.

The minutes are the most important of an array of transparency and accountability reforms.  There is also the quarterly Inflation Report, and press conference, the role for the Treasury committee in cross-examining the MPC, the role of the non-executive directors in scrutinising, monetary policy arrangements, the annual report and parliamentary debate.  As the Treasury Select Committee concluded in its report on Bank of England accountability in July 1998:  ?We agree with the conclusion by the Organisation for Economic Co-operation and Development (OECD) in its country survey of the UK that “In international comparisons the United Kingdom’s framework is among the strongest in terms of accountability and transparency”.?

CONCLUSION – AN ASSESSMENT

I said I would end with an assessment of the framework’s track record over the last four years.  It is early to make considered judgments, but the signs are certainly encouraging.  The evidence does suggest that the British economy is putting past decades of instability behind it and that, with the new policy framework, we have been better able – and are now much better placed for the future – to deal with the ups and downs of the economic cycle.

It is against the three objectives for modern macroeconomic policymaking – credibility, flexibility, and legitimacy – that the new system must be judged.

Credibility

The signs are certainly that – economically and politically – Britain has made a decisive step forward to a credible model of macroeconomic policy-making in Britain.  And largely because of the sound and forward-looking judgments of the MPC, the economy has sustained stability with growth close to its trend over the past four years.

The simplest measure of policy credibility – long-term interest rates – have fallen to their lowest level for 37 years.  The differential between UK and German 5 year forward rates fell by 54 basis points between the beginning and the end of May, while 10 year interest rate differentials with Germany halved from 1.69 percentage points in the week before the May 1997 announcement to 0.88 percentage points by October. This differential has since been eliminated as the MPC’s track record has become established.

In part, this reflects the economy’s inflation performance – a clear improvement in the last parliament compared to the previous one. Since 1997, inflation has averaged 2.4 per cent – in a historically narrow range of 1.8 per cent to 3.2 per cent – compared to 2.8 per cent and a range of 2 to 3.8 per cent in the period between exit from the ERM in October 1992 and the 1997 election.

But it also reflects lower inflation expectations in the new regime.  Inflation expectations 10 years ahead averaged 2.71 per cent in the last parliament compared to 4.78 per cent in the period between October 1992 and May 1997.  And inflation expectations in the financial markets have also converged on the target for the first time with the inflation expectation implicit in index-linked 10 year gilts now down to 2.65 per cent, from 4.3 per cent the week before May 1st 1997.

The behaviour of the labour market has also been very encouraging.  Wage inflation has remained over the past four years broadly in line with the 4.5 per cent a year which the Bank of England has said it believes is consistent with meeting the inflation target.  And this improvement in expectations of stability has not happened at expense of output or jobs. But it is still too early to say we have succeeded in entrenching expectations of long-term stability. Inflation expectations in the financial markets are still just above the 2.5 per cent inflation target while public opinion poll surveys suggest that public expectations of future inflation are at 3.5 per cent, down from 4 per cent pre-independence, but also still above the target.

Employment growth has also been impressive. Far from leading to higher unemployment, as some might have predicted, central bank independence has seen unemployment continue to fall to its lowest level for over 25 years with employment rising – not just nationally but in every region of Britain – at a time when most economic forecasters were expecting unemployment to start to rise rather than fall.  To talk of the prospect of a return to full employment in every region is now a credible goal.

More generally, the past four years have transformed this government’s standing as economic manager and turned upside down the historic reputations of the parties for economic competence – with the new government sustaining a 30 percentage point plus lead over the main opposition on this question throughout the election campaign.  It has laid to rest the myth that a left of centre government, with ambitions for full employment, to cut poverty and for stronger public services, cannot run a successful and prudent long-term economic policy.

Indeed, far from preventing the government achieving its long-term goals, this new and credible framework – independence and clear and disciplined fiscal rules  – has enabled the government to take decisive steps forward towards full employment and greater investment in public services.

The announcement in the 2000 Budget that – within these fiscal rules – spending was set to rise by an average 3.7 per cent a year until 2004 -with spending rising as a percentage of GDP – was taken in its stride by the financial markets.  Indeed, long-term interest rates fell following the March Budget – two weeks later, ten-year UK gilt yields were around 20 basis points lower.

So as the new government starts its second term, the expectation in financial markets that stability and prudence is now at the heart of British economic policy, the vigilance of the MPC and the continuing discipline of the fiscal rules provide a credible platform for next year’s Budget and the 2002 spending review.

Flexibility

The second test is flexibility. It is early to make a definitive judgment.  Four years is not a long time in economic policymaking.  Some argue that this new British model has yet been tested against a severe national or world economic shock.  As I said an Open Letter has yet to be received by the Chancellor, although this is in itself a tribute to the MPC’s success in delivering inflation to target.  And the new system has yet to experience a change of government.

But the new system has – in the past four years – handled an over-heating British economy in 1997; the Asian financial crisis of 1998 – which saw the CBI Industrial Trends business optimism measure fall from ?4 to a balance of ?41 in just a few months;  a trebling of the world oil price between end of 1998 and 2000; and the US and wider global economic slowdown since the beginning of this year.

In each case, the MPC has responded in a decisive and forward-looking way – raising interest rates in 1997 and 1998; a series of rate cuts in the autumn of 1998 and spring of 1999; and again the easing of rates this year as the world economy slowed.

The interest rates response in autumn 1998 was particularly important, with three cuts in interest rates between October and December 1998 – a cut of 1.25 percentage points.  In the old system, such a policy response from the Chancellor would have been interpreted as a sign of panic and crisis.  And some did fear that recession was on the way in 1999.  But the MPC’s handling of the situation stabilised the economy and boosted confidence.  And the 1999 Treasury forecast for growth that year was our worst forecast in the parliament only because we underestimated the strength of UK economic growth.

Contrary to expectations, the new system has also delivered a much more effective co-ordination of monetary and fiscal policy than in the past.  Fiscal policy has been set in a predictable medium-term context.  The ratio of net debt has fallen to historically low levels.  And while economic theory would not have predicted that a 4 percentage point of GDP tightening of fiscal policy would have led to a stronger exchange rate, fiscal policy continues to support monetary policy over the economic cycle.

Legitimacy

The final test is legitimacy.  There is a new consensus in Britain both about the need for stability and the operational framework to achieve it.  Any decision to raise interest rates is bound to be unpopular.  But the fact that main opposition party has dropped its threat to reverse the move to bank independence, that there is now an all-party consensus in favour of this reform and that the MPC could cut interest rates during the election campaign without accusations of political bias, shows that this consensus is becoming deeper-rooted.

But, given Britain’s history, that consensus cannot be taken for granted.  It depends not only on a sustained track record of stability, which no government can guarantee, but also on whether the government can deliver its wider  goals for high and stable levels of growth and employment – and so deliver rising living standards and better public services.  A continuing commitment to stability is a necessary means to these ends.  But, in the end, it will be the success or otherwise of the government’s wider economic agenda –  to close the productivity gap, promote full employment and invest in public services  – that the credibility and legitimacy of British economic policy will depend. These are now the challenges for this parliament.  So as the Prime Minister and Chancellor have said regularly over the past few weeks – the work goes on.

The comments made by Ed Balls, the then Shadow Chancellor of the Exchequer, on 23 April 2015.

The IFS has confirmed that the Tories are committed to the most extreme spending plans of any political party, with bigger cuts than any other advanced economy in the next three years.

And the IFS condemns the Tories for being ‘misleading’ about their plans for cuts to public services. The truth the Tories won’t admit is their plans are so extreme they would end up cutting the NHS. Countries which have cut spending on this scale have cut their health service by an average of one per cent of GDP – the equivalent of £7 billion.

The IFS also warns that Tory plans would mean radical changes to tax credits and child benefit. George Osborne must now come clean on his secret plans to take money away from millions of working families.

With Labour’s plan the IFS confirms that both the deficit and national debt will fall and that we have given more detail on how we will achieve this.

But the IFS’ numbers wrongly assume that Labour will get the current budget only into balance. Our manifesto pledge is to get the current budget not only into balance but into surplus as soon as possible in the next Parliament. How big that surplus will be, and how quickly we can achieve that in the next Parliament, will depend on what happens to wages and the economy.

The Tories might be able to make the cuts but the last five years show they will fail to cut the deficit as they claim. They have borrowed £200 billion more than they planned because their failure to boost living standards has led to tax revenues falling short.