Gulf Costs Affect Major's Future

BRITISH ECONOMY

WAR in the Gulf could dash the hopes of Britain's ruling Conservative Party that under its new leader, John Major, it will be able to restore the economy to good health this year and reap the political benefit of recovery.

A conflict in the Middle East would threaten to disrupt public spending plans, force tax increases, and undermine attempts by the government to recoup its fortunes in the face of a determined bid for power by the opposition Labour Party.

That was the burden of a New Year message to Britain by Norman Lamont, Chancellor of the Exchequer, six weeks after his party ended Margaret Thatcher's long premiership.

Mr. Lamont insisted that halving inflation to around 5 percent by the end of the year was attainable, but there would be no early cut in interest rates, and tight financial control would continue.

Lamont's bleak analysis is known to be fully shared by the new prime minister, who was chancellor under Mrs. Thatcher. At that time Lamont was Mr. Major's financial secretary.

Already, Lamont said, the financial burden of supporting the international coalition against Iraq was proving much heavier than had been anticipated.

Speaking on national radio, Lamont conceded that the British economy was in recession. He said the government had no option but to find the resources necessary for the Gulf operation, but already it had cost L 480 million (US$926.4 million). The costs of a war were ``very uncertain.''

``Clearly, it could affect tax public revenues, and it could also affect public expenditure,'' he said. Cash reserves for contingencies are already under pressure, thanks to spending so far on the 30,000-strong British Gulf force.

The Labour opposition was quick to seek political capital from the chancellor's depressing message to the nation. Tony Blair, its employment spokesman, said: ``The chancellor confirmed that the recession is not an accidental consequence of government policy. It is government policy.'' Mr. Blair noted that over Christmas a group of seven leading economists forecast that unemployment could rise to 2.5 million by the end of 1991. It is currently 1.8 million.

Other economic indicators tend to show that the government faces an uphill struggle to pull Britain out of recession. Professor David Currie, of the London Business School, predicts a 2 percent decline in total investment in 1991.

Bill Martin, chief economist at Phillips and Drew, says the government faces the problem of managing the economy within the constraints imposed by Britain's membership of the European exchange rate mechanism (ERM), which it entered on October 8.

Now that Britain is in the ERM, bringing interest rates down to stimulate the economy will be more difficult, Mr. Martin said. This is because undertook not to let the pound fall below a floor of 2.78 against the deutsche mark.

``The ERM is a factor that may prevent the economy from recovering,'' Mr. Martin said. However, he agreed with Lamont that there was a ``good chance'' of bringing inflation down to 11 percent by summer, and to 5 or 6 percent by the end of 1991.

THE difficulty is that the reduction may come too late for the government to be able to exploit it politically.

In theory, a general election does not have to be held until July 1992, but few postwar governments have run their full five-year term and, if precedent prevails, an election before the end of 1992 is likely.

That is why the impact of the Gulf crisis promises to be a powerful factor in deciding not only the condition of the economy but the future of Mr. Major's government.

As part of his bid to recover popularity, the prime minister has ordered his Environment Secretary, Michael Heseltine, to reform the unpopular poll tax.

Mr. Heseltine's officials say his preferred remedy is to plow more central government funds into local government, thus making it possible to reduce the poll tax. But if spending on the Gulf escalates, the funds may not be available to pay for Heseltine's plans.

Major is deriving little consolation from public opinion polls carried out since he became prime minister on November 27. A Mori poll on December 30 showed that Labour, with 45 percent, had regained its lead over the Conservatives, which received a poll boost immediately after Thatcher's resignation.

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