§ First, stability. By spring last year, with consumer demand already rising by 5 per cent. and the money supply by 11 per cent., but industrial production by only 1½ per cent., the economy was exhibiting the same symptoms of instability from policy error that produced the boom-bust economy of the late 1980s.
§ To avoid a lurch backwards towards the conditions that led to interest rates as high as 15 per cent. in the late 1980s, the Government, and then the Bank of England, took action to ensure stability. And I followed this tightening of monetary policy by putting in place a tough five-year deficit reduction plan.
§ Last November, I was able to report that I was more optimistic that the economy was on course to get back on track for sustainable growth. That remains my view. But I also warned that there were risks ahead—on the one hand, the effects on the world economy of turbulence in Asian financial markets, and on the other, the domestic risk that an unaffordable rise in wage inflation would lead to higher interest rates and slower growth. Those risks remain.
§ A deteriorating situation in Asia has forced all Governments to revise downwards their forecasts for growth. And while this Government have contributed to swift international action, continuing uncertainties require continuing vigilance.
§ Similar vigilance is also required at home in the face of inflationary pressures. In the past few months, wage settlements have risen, even in the manufacturing sector where I fully recognise that a strong pound makes life difficult for exporters. Our aim is a stable and competitive pound over the medium term and I know that exporters agree with me that we must avoid any return to stop-go. It would not be right to sacrifice long-term goals in the face of short-term pressures.
§ No-one should be in any doubt about this Government's, and the Bank of England's, determination to meet our inflation target. I can now report that because of the action already taken, inflation, which when we came to power was heading well above our target and towards 4 per cent, is now forecast to peak at 3 per cent. this year and be at our target of 2½ per cent. next year.
§ It is because we have established a sound long-term framework and the expectation of low inflation that long-term interest rates have come down substantially from over 7½ per cent. just before the election to below 6 per cent. now, the lowest rate for 33 years.
§ Growth this year and next will depend crucially on what happens to wage inflation over the coming year. It would be the worst of short-termism to pay ourselves more today at the cost of higher interest rates, fewer jobs and slower growth tomorrow. All of us must therefore show greater responsibility.
§ If our welfare reforms can be complemented by responsibility across the economy, we could achieve two and a half per cent. growth this year. But if wage bargaining proceeds in the same short-termist way as in the past, then growth this year could slow to 2 per cent.
§ Similarly, growth could be between one and three quarter per cent. and two and one quarter per cent. next year and, as the economy returns to its sustainable path, growth could be between two and a quarter and two and three quarters per cent. in the year 2000.
1099§ Stability also requires a commitment to prudence in fiscal policy. The Chancellor is above all the guardian of the people's money. Last year, spending exceeded revenues by £23 billion under the previous Government and when we came into power we inherited not only a cyclical deficit, but a substantial structural deficit in excess of 2 per cent. of national income. Immediate action was required to secure long-term deficit reduction.
§ The five-year deficit reduction plan that I put in place last July is not only on track, but is being achieved more quickly than expected. A substantial fiscal tightening has been achieved this year, with borrowing coming down by more than £17 billion, over 2 per cent. of national income. Because at this stage of the cycle it is important to come down on the side of caution, my Budget will lock in this fiscal tightening for 1998–99.
§ Therefore, even if we exclude the windfall tax revenues, borrowing—which the previous Government had planned at £19 billion for this year—is now expected to be £5 billion, a fall from 3 per cent. of national income last year, under the previous Government, to around a half per cent. this year, comfortably within the Maastricht criteria.
§ On the same basis, borrowing is expected to fall to just under £4 billion in 1998–99. By 2000, the Budget is forecast to be in balance.
§ But our fiscal objectives are more long term: to meet the golden rule—that over the cycle Government revenues will cover consumption—and to keep debt at a prudent and stable level. Previous Governments have made the mistake, most recently in the late 1980s, of claiming that they had solved our deficit problem when all they had was a short-term surplus. Surpluses in 1988 and 1989 collapsed into a deficit approaching £50 billion in just four years—the biggest deficit in our history. What was claimed to be the end of one crisis turned out to be only the beginning of the next.
§ We are determined to avoid such mistakes. To balance the Budget for one or two years and then let it run out of control in the years that follow is simply to fail those who depend on public services being sustained year in, year out. So this, more than ever, is the wrong time to be complacent or in any way to compromise our commitment to long-term fiscal stability.
§ Just as we locked in our commitment to sound money through the Bank of England, it is now time to lock in a framework which guarantees sound finances. Our code of fiscal stability will place a duty on this Government, and every future Government, to report to Parliament on a consistent basis and provide full explanatory information on how they are meeting the fiscal rules that they have set. Stability and prudence are merely the preconditions for success—the platform from which success can be built. It is time now to show similar ambition and determination in the pursuit of long-term increases in productivity.