Leading Article: Clarke must resist the siren voices

THE SIREN voices calling to the Chancellor from the Tory backbenches have become insistent in recent days, emboldened by good news about the state of the economy. Inflation has fallen to its lowest level for 25 years, it is suggested, so there is no need to raise interest rates. Since government borrowing is running below projections, there is even a temptation to bring forward promised tax cuts.

With the Government so far behind Labour in the opinion polls, it is hardly surprising that its backbenchers are anxious to convert economic success into the fabled 'feel good' factor. Kenneth Clarke may profess to be a political Chancellor, rather than an economic one, but to succeed politically he must first get his economics right. Early tax cuts and too late a rise in interest rates would be bad politics and worse economics.

The Bank of England has been agitating about short-term prospects for inflation for the last two years. But this does not undermine the validity of its stance: that, because interest rate changes take time to have their effect, they will have to rise well before any bad news shows up in the headline inflation figures.

With the economy growing more rapidly than its long-term trend rate - and probably more quickly than official statistics suggest - the Chancellor cannot long delay an increase in rates. Yesterday's retail sales figures suggest that tax rises have had little impact so far on consumer spending. But, even if spending were to slow in coming months, that would be no bad thing. Some rebalancing of recovery - away from high-street spending and towards investment and exports - is essential to its long-term strength and durability.

The Chancellor should resist calls for an early cut in taxes for much the same reason, not least because government borrowing is falling rapidly only because growth is so strong.

There are dangers in striking at inflation too early. When the Swedish Riksbank raised its interest rates last week, citing exactly the inflationary omens that worry the Bank of England, its currency fell. But the City looks better prepared. If Mr Clarke were to raise rates during the autumn, this would be seen as a sensible, pre-emptive move.

It is well to remember that in Britain, where the burden of mortgage and consumer debt is larger than in most countries, inflation retains a seductive appeal. But the promise to keep inflation low is one of few that John Major has yet to break. The Chancellor would be advised to act early to keep it low.