Bank of England Independence and the ‘Golden Rule’ were once the coping stones of New Labour’s economic competence. A decade on, they’re still doing their job; resisting inflation and curbing public debt. Unfortunately for the government which laid them, these solid foundations have become immovable political obstacles.
The Bank was given independence over interest rates in 1997 and an inflation target of 2.5%. This was designed to assure middle England of New Labour’s economic literacy. As is supposed to happen, the Bank has refused to cut interest rates as inflation overshoots target. This is politically unfortunate as the economy moves into negative growth and unemployment rises. It means that on the monetary front there is nothing the government can do to reflate the economy (or its poll ratings).
On the other hand there is the fiscal front. But here too the government has hoist itself. Again, to convince the country of New Labour’s financial prudence, Gordon Brown set a Golden Rule, or a borrowing limit of 40% of GDP across an economic cycle. This particular piece of economic trickery has left the government little room for tax cuts or public spending to stimulate growth. It is not that public debt is historically high, in fact it is about the same as it was in 1997. It is rather that the government risks under-cutting the basis of its economic credibility if it over-shoots its Golden Rule.
The pinch of rising fuel prices and the credit-crunch is squeezing the government as much as the public.