Braking Hard On Road to '90
LONDON — BRITONS have been told to brace themselves for an uncomfortable economic ride in 1990. Interest rates are expected to remain high (base rate is currently 15 percent). Inflation (7.7 percent in early December) and unemployment (1.65 million) are predicted to taper off only slowly.
John Major, the new chancellor of the exchequer, delivered these dispiriting end-of-year tidings amid deepening concern that the economic prosperity created by a decade of Thatcherite government has given way to a period of uncertainty and sluggish growth.
Mr. Major took over the economic management of Britain when Nigel Lawson, his long-serving predecessor, quit Margaret Thatcher's cabinet on Oct. 26, accusing the prime minister of listening to part-time advisers more than to him.
Major has inherited what most financial-district economists see as a situation offering little hope of recovery before 1991. Some doubt there will be a significant upturn before the general election expected in 1992 - which could be bad news for Mrs. Thatcher, who is determined to win a fourth term as prime minister.
Major has admitted that the roots of Britain's current problems lie largely in the government's response to the stock market crash of late 1987. In his autumn statement on the economy, Major said ``some mistakes'' had been made - mainly a failure to appreciate the economy's underlying vigor. A resulting decision to cut taxes and ease credit produced a consumer-led boom.
Now, following a series of interest-rate increases in 1989, the economy has begun to slide. Retailers in the pre-Christmas period reported slack sales, and with many mortgage rates 50 percent up on late 1988, house prices in many parts of Britain are as much as a quarter below year-ago levels.
Official figures offer Major and the British public little consolation. According to the latest Treasury forecasts, Britain's economic growth next year at 1.25 percent will be less than half that of 1989 and markedly slower than that of its leading European Community partners.
The balance of payments deficit, which reached a record 20 billion (US$32 billion) in 1989, is expected to be at least 15 billion in 1989, and remain large for some years ahead.
Gavyn Davies, chief UK economist at the investment bankers Goldman Sachs, notes that Major's approach to Britain's problems is similar to Lawson's - not surprising, seeing that he was the ex-chancellor's deputy until six months ago.
``He is depending heavily on high interest rates to curb inflation; but that policy, in the short run anyway, seems likely to push prices up,'' Davies said. ``Since he took over, he has allowed sterling to depreciate against the German mark, and that may cause inflationary problems, too.''
He went on: ``Major apparently hopes the situation will stabilize, but he is likely sooner or later to have to choose between increasing base rates further, or allowing the pound to drop to still lower levels. That could be awkward, because a serious decline in the currency probably could not be absorbed without the risk of higher inflation.''
The Labour opposition is pointing up the government's economic embarrassment. John Smith, the ``shadow'' chancellor, said: ``If Nigel Lawson had not slashed taxes for the rich, and let the economy rip in his 1988 budget, we would not be having these difficulties. He seriously miscalculated, and now Mrs. Thatcher ... must bear the responsibility for that.''
William Keegan, author of ``Mr. Lawson's Gamble,'' a new book about the former chancellor's policies, believes it will take time to put the economy back on an even keel, and that problems should be addressed in the context of Britain's membership of the European Monetary System (EMS).
``Lawson wanted us to be a full member of the EMS, but the prime minister opposed him,'' Keegan said. ``Now Major faces exactly the same dilemma.
``Our base rate had to go up because the West Germans put up theirs. It would be better to be part of the exchange rate mechanism (ERM) than to be pushed into actions we can't influence.''
Mrs. Thatcher and Major, however, have continued to stress that Britain would be unwise to accept the discipline of the ERM before it gets inflation down to levels close to those in West Germany and France. Their inflation is running at roughly half the British level.