The 1991 Budget: Fiscal Policy inside the ERM

<p>In the past four years, the economy has been suffering from the problems of excess demand. For as long as demand exceeded potential supply, it was not possible to be optimistic about the economic outlook; either inflation had to take the strain, or the current account had to stay in heavy deficit. The Government attacked this problem mainly by tightening monetary policy from mid-1988 onwards and, by the end of 1990, there were at last signs that the economy had returned to much better balance, with demand no longer substantially higher than potential supply. Unfortunately, there may now be an over-correction of demand, with the downward momentum in the economic system likely to depress activity for some time, and probably to take unemployment to levels which exceed its equilibrium rate. This will bring inflation down on a sustained basis.</p>