Sunday, December 18, 2005
Soft landing could make Brown's task harder
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

AS he surveys the likely landscape for the next few years, Gordon Brown has several problems. Politically, he has to present himself as different from Tony Blair without sparking allegations of disloyalty, avoiding an outbreak of what the lobby calls the “TB-GBs”.

Politically, too, he has to prepare the ground for a tougher environment for public spending in the three years from 2008, while trying to convey the message that things would be much worse under a Tory government led by David Cameron.

The underlying point is that spending has to be tight to have a chance of meeting the fiscal rules, so any talk of tax cuts is ridiculous. But explaining that is not easy and Brown has so far made a hash of it.

The chancellor’s real problem, though, is one of voter complacency about the economy. The longer the economy does well the more people take it for granted. Growth this year is sluggish but there is no whisper of recession. Inflation dropped last month to 2.1%, within a whisker of the official target. There is a strong sense that economic stability is here to stay. Brown’s difficulty will be if people believe they no longer need him to guarantee that stability, and that his youthful Tory opponents would do at least as well.

This wasn’t the case in the 2001 or 2005 elections, when Labour’s opinion-poll lead on economic competence was huge. In 1997 Labour benefited from a loss of voter confidence in the ability of the Tories to run the economy. In 1992 the boot was on the other foot; the economy was in trouble but, perhaps because of this, Labour was seen as too big a risk.

I wouldn’t suggest that Brown deliberately tries to create some economic turbulence over the next couple of years to persuade people that handing over to the Tories would be too risky. But he needs to do something. An 18-year-old voting in the 2009 election will have been in nappies and blissfully unaware of the last time Britain had a real economic crisis — sterling’s “Black Wednesday” expulsion from the European exchange-rate mechanism (ERM) in September 1992.

On the assumption that children do not take an active interest in politics (and even less in economics) until they are in their teens, most voters in the 18-34 age group in 2009 will be unaware of having lived through that turbulence.

Cameron was brave enough last week to describe his own role then as a young adviser to Chancellor Norman Lamont — in an otherwise unremarkable speech on the economy. But it was a calculated risk; part of the reason he was able to do so is because memories are fading and 1992 is becoming a historical curiosity, of little relevance to today.

So, for that matter is 1976. Perhaps the lowest point for Britain’s economy in modern times was late that year when the Labour government was negotiating a bail-out from the International Monetary Fund. The stand-by arrangement, granted in early 1977, was in effect a multi-billion-dollar international overdraft for the UK, in return for the adoption of cuts in public spending and money-supply targets.

Last weekend the Treasury published on its website 34 documents from the period. They do not change the story much, although they reveal some of the behind-the-scenes machinations. There are briefing notes to chancellor Denis Healey, guiding him on how to put this national humiliation in a positive light.

Just to prove that some things never change, Treasury officials of the time express their exasperation with The Sunday Times over a story that led to a sharp fall in sterling when the government least needed it.

George Osborne, the shadow chancellor, has suggested there is something fishy about the release of these documents, which show the current record in a favourable light. That’s stretching it; the fact that these disasters occurred under Labour could play either way.

Even as historical curiosities, however, 1992 and 1976 show how far we have come. Britain is no longer the most inflation- and recession-prone of the leading economies. No longer does Britain catch a nasty dose of flu when the rest of the world has a mild sniffle.

The record is good compared with the past, and with other countries. For the kind of high unemployment that used to be regarded as permanent in Britain, one only has to look across the Channel.

Back in 1992, when Lamont — with the speech-writing help of Cameron — rebuilt policy out of the wreckage of the ERM, he and his Treasury officials turned to New Zealand for inspiration. It had adopted an inflation target, and an independent central bank whose governor’s salary was linked to its performance in achieving that target.

New Zealand’s initial problem was that its new regime, combined with fiscal-policy orthodoxy, was good at controlling inflation but bad for growth and unemployment. More recently it has had plenty of growth, led by consumers, but also more inflation than is comfortable. Inflation is well above the 1% to 3% target range, interest rates have just gone up to 7.25% and the current-account deficit has ballooned to 8% of gross domestic product. It isn’t a crisis, but it isn’t exactly stable either.

So we should criticise but also recognise the success Britain has achieved. The Organisation for Economic Co-operation and Development said the UK had the most stable growth and inflation performance of its 30 advanced-country members between 1998 and 2004.

Many factors explain that. The Thatcher reforms of the 1980s made Britain’s product and labour markets flexible. Lamont’s inflation- targeting regime not only provided Labour with a framework but also set up the conditions for Bank of England independence. The Bank grabbed its new responsibilities in 1997 and ran them with great success. It wasn’t all Brown’s doing. Although he would rather like it if you thought it was.

PS No matter how many words of wisdom, or otherwise, pour out of this column each week, the thing people remember best, judging from my recent contacts, is the skip index. To update you: the skip count in my street now is two, indicating normal economic growth (zero is recession, four a boom). I suspect, however, one of them may have been abandoned.

I am always on the lookout for new indicators, as regulars will know, and have had some excellent suggestions over the years. But now, in my effort to take the skip index into the 21st century, let’s try for some high-tech ones. It could be something to do with mobile phones, the internet, iPods, iPaqs, Blackberries or Raspberries (I made that one up, I think). There’s also the traditional Economic Outlook quiz, to help keep your brains in gear over the next couple of weeks.

There are just three questions.

Q1. On the basis of published figures, how many successive quarters has Britain’s economy been growing? (a) 37 (b) 45 (c) 53.

Q2. The Bank of England’s repo or base rate is 4.5%. How high and how low has that rate been since independence in May 1997?

Q3. Ben Bernanke will soon succeed Alan Greenspan as Fed chairman. Mervyn King took over from Eddie (now Lord) George in 2003. But who preceded Greenspan and George in their posts? There are two prizes: one for the quiz and one for the indicator competition — a low-tech book. You get a choice of Free Lunch, although I suspect most have already got it, or The Blair Effect, 2001-5, edited by Anthony Seldon, to which I contributed a chapter.

The results will be announced on January 8, but before then I’ll be back on January 1 with my annual forecasting league table.

From The Sunday Times, December 18 2005


There are some additional questions in the quiz:

(4) Between Mar - Aug 2006 the heavily indebted US consumer will stop spending. The ten countries (japan, germany, china etc) who currently finance this indebtedness will see a drastic fall in their exports to the USA and will be under pressure to reduce their purchase of US T-bills. In order to attract the necessary $2bn + per day to finance the debt the Federal Reserve will:
(a) try to attract international investment by raising IR's above 5%
(b) continue to print increasingly greater number of US dollars
(c) both of the above

(5) Raising US IR's will put pressure on both the pound and the euro and as a consequence
(a) both will slide relative to the dollar
(b) the relationship will remain steady as increasing amounts of dollars are effectively devaluing all currencies vis-a-vis precious metals
(c) uk and europe will be forced to raise their IRs to levels which are uncomfortable for growth and employment

(6) By the end of 2006
(a) Ir's will be US 6%, UK 5%, Euro 2.75%
(b) Gold will be trading at $700/oz, oil $50 pb
(c) growth US 2.5%, UK 1.5%, euroland less than 1%

Posted by: assetpriceinflation at December 19, 2005 10:17 AM

I like your skip index.

One I use in London is the number of white vans - (convertibles and 4*4s).

Seems to give a good indication of a street/neighbourhood on the up or down.

Posted by: MktRshrchr at December 19, 2005 11:47 PM