The London Business School with Gower Publishing

Abstract

The knives are out for the Chancellor whose opinion poll ratings are at a record low level. He is being personally blamed for the Conservatives' poor showing in this month's elections and, according to newspaper reports, is certain to lose his job in a Cabinet reshuffle, probably in the summer. Mr. Lamont has presided over the UK economy over a difficult period ‐ though many of his policies and problems were inherited from his predecessor (Mr. Major) ‐ and arguably he should have resigned last September following the failure of the ERM policy and the huge cost of intervention. Since then Mr. Lamont, probably on the advice of his Treasury officials, has followed a determinedly non‐populist approach, notably on public spending last autumn, interest rate cuts earlier in the year and tax increases in the Budget. But, as economic recovery becomes better established, and the focus turns to the structural problems of the British economy, it is evident that some very tough choices will have to be made. Over the medium term the balance of payments and public sector deficits are going to have to be tackled which means devoting resources in the first place to exports and investment, not to consumption. This means no more interest rate cuts, higher taxes and public spending cuts, which Mr. Lamont has already shown he is willing to implement, and requires a Chancellor who is able to stand up to the more populist and erratic approach of the Prime Minister. The danger would be that a new Chancellor, seeking to court popularity in a way that Mr. Lamont has not, opts for the easy alternative in the short run ‐ to the longer‐term detriment of the economy. Almost by definition, certainly in the absence of either an independent Bank of England or an external exchange rate constraint, only the Treasury can take the tough line and so the Chancellor has to be unpopular ‐ Nigel Lawson's best received Budget, that of 1988, is now universally damned. Mr. Lamont may be about to be buried but he should be praised for taking the non‐populist line.