Editing Norman Lamont (section)

===Post-ERM chancellorship===
Following Britain's exit from the ERM, Lamont had two major tasks: to replace the ERM with a new framework for [[monetary policy]], and to address the sharp increase in government borrowing caused by the recession and the rapid fall in inflation. In a letter to the Chairman of the House of Commons [[Treasury Select Committee]] in October 1992, Lamont set out a new basis for the conduct of monetary policy centred on [[inflation targeting]]. He set a target range for inflation excluding mortgage interest rate payments<ref>which can otherwise lead to distortions in the headline inflation figure, as a rise in interest rates to bring inflation down will, in the short term, lead to an ''increase'' in mortgage interest payments.</ref> of 1–4%, falling into the lower part of the range by the end of the Parliament. In assessing progress toward meeting the inflation target, there was a target for the growth of narrow money (M0) and monitoring ranges for the growth of broad money (M4). Decisions on interest rates would also take account of house and asset price inflation and the exchange rate. Transparency and market credibility would be enhanced by the publication of a monthly monetary assessment and the Bank of England was asked to produce a quarterly inflation report.<ref>A summary of the framework for monetary policy can be found at http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/jennifersmith/policy/1inflationtargeting.pdf</ref> These innovations marked a decisive break with the past and a necessary step toward central bank independence. Inflation targeting was the basis on which the Bank of England was made independent by the Blair government in 1997, the Bank's [[Monetary Policy Committee (United Kingdom)|Monetary Policy Committee]] being made accountable for achieving the government's inflation target.<ref>See for example p. 3 of {{cite web |url=http://www.princeton.edu/svensson/papers/PalgraveIT.pdf |title=Archived copy |access-date=27 April 2009 |url-status=dead |archive-url=https://web.archive.org/web/20081201200645/http://www.princeton.edu/svensson/papers/PalgraveIT.pdf |archive-date=1 December 2008 }}</ref>

The new framework enabled interest rates to be cut from the 10% that they had been within the ERM to 6% by January 1993.<ref name="bankofengland.co.uk"/> Inflation continued to fall. In June 1993, the first month after Lamont had left the Treasury, Britain recorded its lowest monthly rate of inflation since February 1964.<ref name="statistics.gov.uk"/> According to Alan Budd, the Treasury's Chief Economic Adviser during the period, the important step of central bank independence could only have been successful once monetary stability had been achieved; "In 1997 the Bank of England was not asked to succeed where politicians had failed; it was asked to maintain the rate of inflation, namely 2.5%, that it inherited."<ref>Alan Budd, 2004 Wincott Lecture in ''Black Wednesday'', Institute of Economic Affairs (2005), p. 30.</ref> In Budd's view, the essential elements of the new framework and its success in achieving low and stable inflation were the establishment of an inflation target and the institution of monthly meetings with the governor of the Bank of England to discuss interest rates. The new framework, according to Budd, "worked extraordinarily well." "Credit must be given to those, principally Norman Lamont, who designed and implemented it."<ref>Alan Budd, 2004 Wincott Lecture in ''Black Wednesday'', Institute of Economic Affairs (2005), p. 31.</ref>

Lamont's second task was to reduce government borrowing, which was rising sharply because of the twofold impact of the ERM on the public finances. The loss of output had reduced tax revenues and increased public spending as unemployment rose. The sharp falls in inflation further reduced tax revenues compared to previous forecasts at the same time as increasing public spending after inflation, because public spending is planned in cash terms which becomes worth more in real terms if inflation falls. The March 1993 budget forecast a [[Public Sector Borrowing Requirement]] for 1993-94 of £50bn, equivalent to 8% of GDP.<ref>''Financial Statement and Budget Report'', HM Treasury (March 1993), Table 6.1.</ref> In terms of the Public Sector Net Cash Requirement, the definition currently in use to measure the UK government deficit, the actual deficit for 1993–94 of 6.9% was the highest since 1975–76 at 9.2%<ref>''Economic and Fiscal Strategy Report and Financial Statement and Budget Report'', The Stationery Office (April 2009), Table C16.</ref> but just over half the 13.3% deficit projected for 2009–10 in the April 2009 budget.<ref>''Economic and Fiscal Strategy Report and Financial Statement and Budget Report'', The Stationery Office (April 2009), Table C2.</ref>

To reduce government borrowing, the March 1993 budget announced a rising wedge of tax increases – £0.5bn in the first year, £6.7bn in the second, rising to £10.3bn in the third,<ref>''Financial Statement and Budget Report'', HM Treasury (March 1993), Table 1.1.</ref> the aim being to give markets confidence that government borrowing was under control without damaging the recovery. Although the budget provoked a fierce reaction in some parts of the press, its reputation improved with the passage of time. After the 2009 budget, the ''Sunday Times'' editorialised that Lamont's budget had been so badly received that he was out of his job within two months, "but it fixed the public finances and set up the prosperity of the 1990s and beyond"<ref>{{cite news | url=http://www.timesonline.co.uk/tol/comment/leading_article/article6169399.ece | work=The Times | location=London | title=A shoddy budget from a discredited government | date=26 April 2009 | access-date=20 May 2010 | archive-date=10 May 2011 | archive-url=https://web.archive.org/web/20110510013206/http://www.timesonline.co.uk/tol/comment/leading_article/article6169399.ece | url-status=dead }}</ref> and Derek Scott, [[Tony Blair]]'s economic adviser from 1997 to 2003, wrote that Lamont was "rightly praised" for putting in place the post-ERM framework, that stage of Lamont's career being "due for rerating since, in addition to designing a proper framework for monetary policy (later consolidated by Bank of England independence in 1997), he also took most of the tough decisions on spending and tax to put the public finances on the road to recovery."<ref>Derek Scott in "Black Wednesday", Institute of Economic Affairs (2005), p. 35.</ref> Sir [[Alan Walters]], whose opposition to the ERM as Mrs Thatcher's economic adviser triggered Nigel Lawson's resignation as chancellor, wrote on the buoyant state of the British economy in 2001 that "all the difficult and correct decisions that produced this happy state of affairs were taken and implemented by Norman Lamont, who thus showed himself, in his Mark 2 post ERM version, to be not only the most effective but also the bravest Chancellor since the War."<ref>''The Times'' 25 August 2001.</ref>