Commentary: Policy on U-turns remains the same

Is it a U-turn or is it not a U-turn? The Prime Minister's interview on Tuesday night, together with Whitehall briefings, left few doubts that growth was to have a higher priority. This was in turn consistent with the mood music being played by policy-makers, and in harmony with the songs sung in the Chancellor's bath. After all, if the Government can somersault on pit closures, a little macro- economic acrobatics should be easy.

Yesterday, though, there was a stream of denials of any policy change. The Treasury has never been able to bring itself to admit error except in the most dim and distant past. The first principle of the Treasury's economic policy is that it is always unimprovable, and the second principle is that it is wholly consistent with whatever has gone before.

Thus we have the blind assertion that nothing has changed since we left the exchange rate mechanism because we are still trying to reduce inflation, and have set explicit targets of 2 per cent (with a 1 to 4 per cent flightpath) for doing so. You do not, though, need much common sense to realise that an entire change in the means of achieving an objective amounts to a difference of policy.

There is also a wide divergence of opinion about what would be consistent with the Treasury's inflation targets. The monetarists tend to believe that the economy is so depressed, and the forces of debt deflation so entrenched, that interest rates could safely be cut to 6 per cent without rekindling inflationary pressures. (As we argue elsewhere, this view becomes credible only if such an easing in policy is accompanied by institutional changes to ensure that monetary and fiscal policy are properly tightened during a recovery). So the Government still has plenty of room for disagreements over how far and how fast it should ease.

So far, not even the close participants in the policy debate are in a position to predict the outcome. There are certain results that are nevertheless worth a small bet. The first is that interest rates will continue to come down. The backbench pressure for further easing is now so intense that the Government is probably prepared to wear even a prolonged period of sterling weakness. But do not expect cuts of more than a point at a time, simply because the instinct for gradualism dies hard. Pyrotechnics are not the Treasury's style.

The second bet is the one of most interest to the City: the former Treasury knights who have absconded to merchant banks (like Sir Adam Ridley, Sir David Hancock and Sir Peter Middleton) can lick their lips, because the Prime Minister is serious about a further relaxation of the rules prohibiting private funding of public projects.

At present, many projects are stopped by the Treasury's own Catch 22: if they are risk-free, they should be undertaken by the public sector because it can borrow more cheaply from the financial markets than private contractors. This is the 'value for money' criterion. But the Treasury says such projects cannot be undertaken now because the borrowing requirement is too high.

Private consortia will be invited to build many more projects. These may even extend beyond the obvious road, rail and bridge projects into build-and-leaseback arrangements for hospitals, schools and university buildings. In effect, many of the capital items in the Public Sector Borrowing Requirement would be put off budget. It would not be the most honest presentation of a public works programme, but it is surely better to do good by stealth than not to do good at all.