The Nominal Framework for Economic Policy

Abstract

The next Budget will almost certainly be the last one before a General Election. Despite the temptations to make electorally attractive cuts in income tax or increases in public spending, we believe the opportunity should be taken to re‐affirm the government's intention to move steadily towards price stability. This is particularly important at a time when our exceptionally high real interest rates may reflect fears about a future change in policy. We provide a nominal framework which extends the Medium Term Financial Strategy to 1992–3. Given the buoyancy of revenue and the likely growth of money GDP next year, we argue that the PSBR should be no higher than £6bn next year. There is a good case for keeping it at this year's expected level of £5bn.