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In the run up to the recent Budget, the Chancellor and his advisors have taken a somewhat defensive position on fiscal policy. They have argued that the inflationary expansion of the UK economy during the last year or so had nothing to do with the substantial tax cuts introduced in the 1988 Budget. They point instead to the massive explosion of credit, particularly mortgage credit, which occured in this period. This, among other things, fuelled a massive rise in house prices, encouraging consumers to extract equity from their property in order to increase other forms of consumption. Moreover, the Chancellor affirms that the Government's accounts were already in surplus at the beginning of the 1988/89 fiscal year, and that this surplus increased substantially through the year: thus fiscal policy was contractionary rather than expansionary. More generally he and his advisors argue that fiscal policy is an inappropriate instrument for short run demand management which should be left to monetary policy: instead fiscal policy should be aimed at improving the supply side performance of the economy.

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