The Chancellor in waiting

Suddenly a real, live, big-picture Labour policy. In the most important speech Gordon Brown has made since the general election, the Shadow Chancellor will this afternoon unveil with some precision the arrangements he intends to operate on the highly topical issue of monetary policy. It is, as it happens, a coincidence that Kenneth Clarke's decision not to raise interest rates in the immediate future should once again have thrown the issue of the Bank of England's relations with the Treasury into sharp focus. For Mr Brown's pronouncements today on the fixing of interest rates are the fruits of many months of labour and discussion. And they will come as little surprise to the Bank itself.

Mr Brown is determined to be - wait for it - "tough on inflation and tough on the causes of inflation". But what he will not do today is announce that that the Bank of England will be independent under Labour. In the course of a long interview he repeatedly stressed that under an incoming Labour government the Bank would retain its "advisory role", that the Chancellor will continue to meet the Governor regularly, and that the Chancellor will be responsible for deciding the level of interest rates.

Nevertheless, no one should underestimate the long-term impact on the landscape of monetary policy of what Mr Brown calls his "radical" and "innovatory" plans for the Bank. Most important of all, he believes that with the creation of a powerful new full-time monetary policy committee within the Bank, he is going much further towards his declared goal of seeing that "the process must be free of allegations of party political manipulation" than Mr Clarke can afford to go.

The monetary policy committee, separate from the Court of Directors and to be appointed by the Chancellor - from a pool which goes much wider than the Bank's present officials - is something quite new; in the Labour leadership's view the most radical change since the 1946 Act that established the Bank's present relationship with the Treasury. Mr Brown rules neither in nor out the possibility that the minutes of its deliberations might be published along with those of the meetings between Governor and Chancellor. Instead he promises consultation on that issue. But, interestingly, Mr Brown does not appear to rule out further developments either. A future Labour government will, he says, "look at how the reforms work - the monetary policy committee and how the Bank does its job in terms of the advice it gets". Yes, he is determined on the government's role; he is not covertly turning the Old Lady of Threadneedle Street into a Bundesbank or anything like it. "We're looking at how the Bank can perform better in its advisory role and how the government fits into that process. We are not looking at an independent Bank of England or saying that the Chancellor is not involved. The Labour government will set the inflation target. The bank will not set the target."

Here there is an interesting use of language, containing just the merest hint that if the reforms fulfil the criteria of "professionalism and objectivity" which Mr Brown consistently says he wants, that in the very long run the Bank might finally be given the full operational responsibility for month-by-month interest rate decisions on how to meet the government's inflation targets. He says: "Before we move any further it's important to have these reforms in place, including the monetary policy committee." What does he mean by "before we move any further?" Mr Brown plays a straight bat: "I'm not prejudging the issue but I have decided these reforms are necessary for the Bank to perform its advisory role."

These, along with a statement of his commitment to tough controls on borrowing and spending, will make news today. But there is something else less tangible, but as important if not more so: an abandonment of much of the rhetoric and nostrums of Seventies and Eighties Labour. Mr Brown does indeed want to build a "consensus" about the country's long-term economic objectives. "Short-term narrow political considerations in the last 50 years have led Britain to lose sight of national economic purpose and there should be a dialogue and an openness that makes possible that dialogue - so you can actually get a consensus about, for example, what is the sustainable growth rate for an economy."

But out goes the cosily corporate "national economic assessment" beloved of pre-1992 Labour, with its emphasis on the CBI and the TUC and the government fixing joint targets on economic performance. In comes the Medium Term Growth Strategy and the "green budget" - the paper Mr Brown plans to produce six months before each budget to trigger widespread and open public debate on the options facing the Chancellor.

"When I say we've looked at the experience of the Seventies and we've looked at the experience of the Eighties, we reject the idea that the government can do everything and we reject the idea that we can do nothing. There's no picking winners. There's no government by subsidy. We're not trying to replace the role of commercial managers. And we are not going to make government some short-term manipulator of the economy at the expense of the long term."

And in comes a new Labour analysis of inflation after 16 years of opposition - one that gels with the Bank of England's most recent inflation report pointing to the problems of capacity and investment as well as to short- term monetary policy. Mr Brown says: "Inflation is an enemy of the poor; an enemy of pensioners, an enemy of middle-income families in this country ... our explicit commitment to an inflation target expresses not only a determination to achieve it but also to understand the causes of the inflation."

When he says that he will be tough on the causes of inflation, he means precisely the sort of capacity constraints and bottlenecks that the Bank pointed to. And he rejects outright the argument that fuller employment will generate more pressures of wage inflation. "On the contrary, if your economic problem starts to be skill shortages which put up the price of labour in certain sectors then a clear solution is having people with skills in sufficient numbers to allow them to take up these jobs."

Which, he says, is why Labour is committed to supply-side measures on training and education. But it is also "why our Medium Term Growth Strategy is absolutely central to the long-term defeat of inflation. You've got to defeat the inflation problem in the British economy and an inflationary psychology that assumes that every time we expand, because we don't have the capacity in the British economy, inflation will come back. The Government has not solved that problem."

But as Mr Brown very well knows, the Bank of England matters too. No one knows how the Bank's standing will develop for the next two years and beyond. But the shake-up Mr Brown will outline could prove to be a staging post on the road to operational autonomy for the Bank, which no Chancellor, Labour or Conservative, has ever contemplated while in office.