Leading Article: The only way forward

NOT before time, both the Prime Minister and the Chancellor of the Exchequer are going on to the offensive against those Conservatives who rail against the constraints imposed by membership of the exchange rate mechanism. John Major told the Commons yesterday that he would not risk the gains made against inflation with a premature cut in interest rates, and ruled out devaluation or taking sterling out of the ERM. Norman Lamont delivered the same message in powerful detail in his speech to the European Policy Forum on Friday.

When the Government's Tory critics say they favour a devaluation of sterling - within or outside the ERM - what they are really saying is that they want more inflation. In practice, no currency can be devalued without stimulating inflation; devaluation sends up the cost of imports and prompts workers to demand higher wages to compensate for their reduced purchasing power.

Some seek to justify themselves by arguing that a modest dose of inflation would help to reduce the mountain of debt taken on by consumers and companies in the Eighties, and so accelerate a return to more normal levels of spending and consumption. But once that road to the debauching of the currency is embarked upon, there is no preventing its other consequences. Prominent among these will be higher interest rates needed to offset the increased risk of holding sterling - hardly a potential source of stimulus to the economy.

For both Mr Major and Mr Lamont, the fight against inflation has become nothing less than a moral crusade. And rightly so. Many people have been through much pain in the struggle to reduce inflation. Some have lost their houses, others their businesses, many their jobs. Those who argue for devaluation and a return to inflation are suggesting that the battle is not worth winning, that all the suffering has been in vain. Experience shows that it is economies with strong currencies, such as those of Japan and Germany, that flourish, not those which devalue: witness France's changed fortunes since it stabilised its currency and achieved lower inflation than Germany within the ERM.

That does not mean nothing can be done to improve consumer confidence. Few factors have contributed more powerfully to the recession than falling house prices. One possible short-term measure to revive the housing market would be to raise the ceiling on mortage income tax relief - for first buyers only - from pounds 30,000 to pounds 60,000 for a limited period of five years. Another would be to introduce a mortgage benefit scheme for low- income buyers.

It is anomalous that those who are out of work can receive help with their mortgages from housing benefit. So can low-income or unemployed tenants who cannot pay their rent. No such help is available for those in work but poorly paid. Unemployed mortgage payers receiving such help are thus discouraged from returning to low-paid work, in which they might find themselves worse off.

The extension of owner occupation was a key aspect of Conservative policy under Margaret Thatcher. Some of those who became owners lower down the income scale were not well equipped to assess the costs of their new commitment. It is an injustice that those who were encouraged to make the leap should be heavily penalised for their responding to the Government's urging. The Joseph Rowntree Foundation has calculated the cost of such a scheme might be kept to pounds 410m, without counting the gains from tax revenue and reduced spending on unemployment benefit resulting from people returning to work. In the battle against inflation itself, there must be no concessions and no let up. As Mr Major said yesterday, non-inflationary growth is the only way forward.