Leading article: Something rather splendid at the Bank

Welcome to the modern world - a place we have inhabited since last Friday morning. It is a place where you talk in a civilised fashion to your European neighbours, where a Secretary of State for the Environment can think aloud about road pricing, and where a Treasury minister can tackle monetary policy in the same way as foreign countries (such as Germany and the United States of America) where interest rates are consistently lower and price stability part of the natural order.

Yesterday Gordon Brown did his bit for modernism. By freeing day-to-day decisions by the Bank of England from Treasury supervision, he also pinned price stability on the Blair government's masthead in a way which, for all their talk, Lady Thatcher's and John Major's Chancellors never managed. New Labour starts to acquire its own historic identity as the low-inflation party. (And, a bonus for a pro-European, Gordon Brown moves the British institutional set-up a good step nearer to the single currency norm.)

What the new Chancellor has done is both dramatic and banal. Dramatic because, at a stroke, he exorcises the ghosts of Montague Norman, Philip Snowden, Lord Cromer and Denis Healey. Banal, because he has done for money no more than umpteen councils have been doing for refuse collection. A public service - the pursuit of stable prices - has been contracted out. The Bank of England gets a target for inflation and is invited to use its big gun - setting the price of money - to secure it. (A really radical Chancellor would have gone further and pegged the Governor's salary to his success; a really, really radical Chancellor would have translated the Bank to a greenfield site in Docklands and flogged Threadneedle Street at a great profit, abolishing those chaps in salmon pink kit on the way.)

What the Bank gets is freedom rather than independence. In the new model the Governor is an expert, expected to use professional discretion. There is a comparison to be made with the courts, although, unlike a judge, the Governor's decisions will affect the livelihoods of many people - their domestic finances, their job prospects. It is appropriate, therefore, that he accounts for the Bank's decisions. Gordon Brown is also turning that "he" into a collective, a Monetary Policy Committee, overlooked by a more representative Court. This reform ought usefully to allow non-City perspectives in.

That word "representative" is ambiguous. Why? Because part of the basic case for giving the Bank autonomy is that the markets trust the Bank more than elected politicians. Only bankers' decisions will command, Gordon Brown said, "the necessary confidence". By clear implication, markets trust politicians somewhat less. All the more reason to ensure that the Bank is held publicly to account.

Gordon Brown is now free to concentrate on welfare-to-work and the next Budget. That "concentrate" could be ominous if it means he is seeking to fine-tune the economy in 1970s style - that is to say, to fiddle with taxes to secure deflation of demand. There is as yet no satisfactory agreement on both the scale of such squeezing or even its necessity. Gordon Brown will do well to avoid being pressganged into unnecessary fiscal tacking.

Much more important for the new Chancellor is to address the fundamental question of solvency. Is this Government committed to spending plans that cannot be supported by likely revenues? Yes, the Chancellor has room for manoeuvre on borrowing. The more successful his new monetary agent the Bank of England is, the healthier look the national accounts. Likewise, the longer the upswing of the present economic cycle lasts, the more buoyant the official revenues. A few more hundreds of millions for the National Health Service budget can be lost and found with ease. But not billions - for social security, pensions, family credit, universities, schoolteachers, school buildings.

If he is to find extra money - significantly more - then he will have to raise taxes. But if the Government is true to its promise not to raise income tax rates, this means finding fiscal space among allowances, corporate taxation, indirect taxes, the taxation of wealth, council tax and so on. That there is such space is undeniable. But the political question has first to be asked: should the Government be raising taxes at all, given its pre-election promises? It is all very well to argue, as some have over the weekend, about the precise meaning of Labour's promises, but the real point is that voters will expect Messrs Brown and Blair to stick to the spirit of their tax pledge, not merely the letter. Nothing would be worse for New Labour's reputation than an attempt to smuggle in tax increases like a Colombian coke-dealer.

Yet Gordon Brown still has room. Take mortgage tax relief. No such allowance should be immune from examination of its effects. It is not needed to encourage house purchase; it does little or nothing to stop dispossession. Conceived as an element in housing policy, the case for its abolition or further restriction is strong. In other words, tax reform for the sake of the Government's social objectives strengthens the budgetary case enormously.

Gordon Brown spoke eloquently yesterday about the long term. His reform of the Bank is a useful first step towards a permanent framework for stable growth. His Budget ought to be another - provided he keeps the future shape of a prosperous and fair Britain at the front of his mind.