It is hard to keep up with the price of oil. No sooner have we got used to $100 a barrel than it is in the $120s. Will the price rise to $150, $200 or even $300 a barrel? How far can it rise without doing severe damage to the world economy?

A few days ago Arjun Murti, the analyst at Goldman Sachs who predicted three years ago the price could top $100 a barrel, said the "superspike" could take it to $150 or $200. His prediction had more impact than a similar forecast days earlier from the president of Opec (the Organisation of Petroleum Exporting Countries).

Neither Murti nor Chakib Khelil, Opec president, are disinterested observers. Goldman is one of the world's biggest traders in energy derivatives and Opec has a vested interest in a high oil price. But Daniel Yergin, president of Cambridge Energy Research Associates, has previously predicted a fall in prices and also thinks $150 is likely.

That would be enough to push petrol up to about £1.25 a litre and diesel to £1.40, well over £6 a gallon. It would also, one would have thought, be enough to tip some economies over the edge.

Indeed, why isn't the rise in prices we have seen already having more of an effect? For those who were brought up on the rule of thumb that every 10% rise in oil prices led to a 1% drop in global growth, the resilience of economic activity in response to sky-high oil is surprising.

Those rules of thumb are, however, no longer relevant, according to the National Institute of Economic and Social Research. In January 2007, oil dipped briefly below $50, and futures markets pointed to a price over the next six to seven years in the $50s and low-$60s. When the institute did its latest assessment, oil was above $100 and the curve suggested it would stay around that level.

Had it not been for that rise, America might have grown 2% this year rather than the 1.3% the institute expects. Growth in Europe and Japan would have been half a point higher. But in Britain, however painful the energy squeeze, the effect is calculated to be small, a mere quarter of a percentage point off growth (the smaller effect is because North Sea oil and gas production, while in decline, is still significant). The inflation effect is bigger, roughly a percentage point across all the advanced economies, but a far cry from the old days.

Ray Barrell, an economist with the institute, said the big change is that economies are less directly sensitive to oil prices than they used to be. The "energy intensity" of growth — the amount of oil, coal and gas needed to produce an increase in gross domestic product — has halved since the 1970s, reflecting greater energy efficiency and the shift away from heavy manufacturing.

Labour markets have also become more flexible, said Barrell, so workers accept temporary reductions in real wages when energy prices rise, while in the past they would have demanded compensation. The wage-price spiral used to mean expensive oil led to inflation, unemployment or both. Central banks now are under less pressure to act to head off the "second round" inflationary effects of dearer oil.

Life would be a lot easier if oil prices fell. So what will happen?

Fans of mine are fond of reminding me I once wrote that the sustainable price of oil was $40 a barrel. I fear some of them did not understand the subtlety of the point so let me try again. It was based on BP's statistical review of world energy, which shows the real (inflation-adjusted) price of oil right back to the Pennsylvania oil boom of the 1860s.

Real oil prices were very high at the start of the period, above $100, but came down by the 1880s and stayed roughly within a $10-$20 range, with occasional jumps, for the next 90 years.

From 1973 to 1985 there was a spike, initially to the equivalent of the mid-$40s, then a peak of over $100, on Opec's flexing of its muscles and the Iranian revolution. Prices then dropped, averaging $20-$30 in real terms from the mid-1980s until 2003. In cash terms, the recent rise above $40 happened only in 2004.

The question was how much prices needed to rise to allow for tighter supplies, rising demand from China and India — as set out in a new paperback of my book The Dragon and the Elephant — and rising costs. Nobody denied this meant a permanently higher level of prices.

Goldman Sachs suggested a five-year average of $60 a barrel, which was at the high end of predictions. Most other forecasters expected a rather smaller adjustment. Everybody, including me, expected prices to be higher than in the past, but not this high.

So today's prices are unusual. Inflation and the dollar's weakness mean the $40 I wrote about three years ago should be adjusted to between $50 and $60. But that is a long way from $125, which is what the market says oil is worth.

Anybody who doubts something odd is going on should look at the reaction to last Wednesday's announcement of a large rise in crude stocks by the US Department of Energy. Instead of falling, prices hit a new record. "It's going higher because it's going higher," said one trader. Did somebody once write of the wisdom of crowds?

In the four years since oil prices broke above $40, global demand has risen from 82.5m barrels per day (bpd) in 2004 to an estimated 87.2m this year. Supply has just kept pace, rising from 83.4m to 87.3m in the first quarter.

Interestingly, demand in the advanced economies is predicted by the International Energy Agency to be 48.9m*bpd this year, 0.5m lower than four years ago, with even North America's oil use down. So it seems that many countries are responding to higher prices in the normal way.

But demand in emerging economies is up 5.2m bpd, driven by China, up 1.5m bpd; the Middle East, up 1.3m; other Asia, up 0.8m; Latin America, up 0.8m, and Africa, up 0.4m.

So when will the oil bubble burst? Probably not until there is more solid evidence that both supply and demand are responding to higher prices. The higher the price, the more likely such a response. But it takes time. In some economies, like China, prices are controlled. Much oil is bought on long-term contracts, not reflecting current market prices.

As I have said before, oil spikes eventually end. But they do not always end quickly.

PS: David Cameron is not the first Tory leader to launch a plan to revive manufacturing. John Major did so after succeeding Margaret Thatcher. Even so, this government launched what it described as Britain's first ever manufacturing strategy in 2002.

Cameron announced the party would link up with Rolls-Royce, "embedding" officials in the firm. All well and good, but we are entitled to be a little sceptical. The announcement came as the Tory leader was about to head north to campaign in the Crewe & Nantwich by-election. Did somebody think of Crewe (where the car company used to be) and Rolls-Royce, put two and two together and make five?

From The Sunday Times, May 11 2008

Recent days have witnessed some extraordinary developments, most of them from the Bank of England. Time was when months would go by without a peep from the Old Lady. Now it has become a news-generating machine that Max Clifford would be proud of.

Development one was Mervyn King's attack on the City's reward culture, which many will applaud, though some would say a bit of performance-related incentive is a good thing. The governor's salary of just under £282,000 — small in relation to many City salaries though with a pension pot of nearly £4m — rises 2% a year, come what may. That gives him an incentive to keep inflation on target but doesn't reward or punish him beyond that.

Development two was a speech by David "Danny" Blanchflower, one of King's colleagues on the Bank's monetary policy committee (MPC). This was, it is safe to say, the most doom-laden speech ever from a UK policymaker, warning that Britain was likely to follow America into recession (whether the US is in recession is still open for debate after first-quarter numbers showed growth), that a fall in house prices of a third in two to three years "does not seem implausible" and the risk of something "horrible" arising from the credit crunch was significant.

Compared with the coded language normally adopted by anybody with anything to do with the Bank, this was a revelation. Blanchflower spends half his time in America and that may explain his gloom, but even there central bankers are a bit more guarded in their language. I am surprised this one got past the censors.

"Developments in the UK are starting to look eerily similar to those in the US six months or so ago," he said. "There has been no decoupling of the two economies: contagion is in the air. The US sneezed and the UK is rapidly catching its cold." I'll return to that.

Development three, hard on the heels of this blood-curdling warning, was the apparent declaration from the Bank that the credit crisis was over and that banks should come out of their shells and start lending again.

This was not quite what its financial stability report was saying: that some gloom in financial markets may have been overdone, in that the scale of losses assumed in US sub-prime assets, a 40% default, looks too pessimistic. Financial markets are assuming many such assets are worth nothing, while on conservative assumptions, and allowing for further falls in American house prices, they are worth something.

The broader message was that the authorities could win one battle, to stabilise financial markets, only to lose a bigger one, that of stabilising the economy.

The Bank thinks lenders, worried about bigger losses in asset-backed securities than are likely, could be entering overkill territory in scaling back activities, leading to "a self-fulfilling adverse cycle". We saw some of this in March, when lenders were falling over themselves to turn away business, and mortgage approvals slumped to 64,000, a record low. As I have noted before, if the banks tighten too much, they risk turning even Blanchflower's extreme gloom into reality.

How serious should we take his warning that where America leads, Britain follows? I was surprised he used the house price*/earnings ratio as the basis for predicting that properties could lose a third of their value. Steve Nickell, his former MPC colleague, did an effective demolition job on it three years ago, and few serious analysts believe the crude ratio is a useful valuation measure.

Constraints on housing supply (with housebuilding rates now in decline), more earners per household, lower mortgage rates, lower long-term real interest rates and other factors explain why the ratio of house prices to average earnings has risen. It probably has risen too much, but there is no good reason to believe it will return to its historic norm, established in very different economic and social circumstances.

As an aside, and I am not including Blanchflower in this, I get fed up with commentators who write that if the International Monetary Fund says house prices are overvalued by 30%, prices have to fall 30%. Basic maths tells you the required fall, if you accept the IMF's numbers, is 23%. Try it on a calculator. Given that the IMF said it could not explain 30% of the rise between 1997 and 2007, the "required" fall is smaller — under 20%.

We can debate until the cows come home how what I think is a more modest overvaluation is worked off. House prices are down on a year ago and incomes are rising, so that process is under way. But what effect does the end of the house-price boom have on the wider economy? Blanchflower was clear. "I think it's plausible that falling house prices will lead to a sharp drop in consumer spending growth," he said.

Contrast that with a speech by Charlie Bean, the Bank's chief economist, just last month.

"Some commentators look at the historically strong correlation between house-price inflation and consumption growth and conclude that if house prices fell significantly, then that would also generate a sharp slowing in consumer spending," he said. "But it is not clear that this need be so."

In the end, the direction of causation may be less important than the result. In the early 1990s the housing market and consumer spending fell, the latter driving the economy into recession, because both responded to a sharp tightening of monetary policy — a doubling of interest rates — in the late 1980s.

It became self-feeding when unemployment rose and people realised the annual rises in cash income they had been used to in the more inflationary 1980s would not continue in the 1990s.

This time it is not the price of credit that is the problem but its availability, which is affecting housing and, if left unchecked, will hit consumers and businesses. In another stunning bit of news a few weeks ago, the Bank announced its £50 billion liquidity scheme for the banks. The quid pro quo for that should be that the banks move out of their overkill phase in reining back lending and return to something more normal. If not, the effort will have been wasted.

PS: Just as there is disagreement on the MPC, so there is on its shadow, which meets under the auspices of the Institute of Economic Affairs. It votes 5-4 to hold Bank rate this week. There are a couple of "Blanchflowers"; both Roger Bootle and Patrick Minford favour a half-point reduction to 4.5% this month. There were also two trimmers, with Kent Matthews and Philip Booth arguing for a quarter-point cut.

Commodity markets are fickle and should not dictate UK interest-rate policy. Gold has fallen 17% in the past few weeks. Will rates be cut? That's harder. King's comments last week suggested not, and two Bank "hawks" — Tim Besley and Andrew Sentance — voted against April's reduction. The markets think there will be no change. But it will be close.

From The Sunday Times, May 4 2008

It never rains but it pours. While the credit crunch hangs over the economy like the grim reaper, food prices have jumped to their highest since 1945 and oil came within a whisker of $120 a barrel. Faced with the twin perils of recession and inflation, policy- makers are earning their money.

Tim Bond of Barclays Capital puts it neatly in a paper called "Out of the frying pan". Conditions are slotting into place for a gradual easing of the credit crunch this year, he argues, but this will be followed by a re-acceleration of global growth next year, putting upward pressure on prices. The credit crunch will give way to an "inflationary crunch", he says.

If he is right it does not look pretty. Central bankers would be damned now if they did not respond to the credit crunch, but they will be damned again if, because of that response, they let the inflation cat out of the bag.

Two decades ago, too many interest-rate cuts in response to the October 1987 stock-market crash were partly responsible for the inflation of the late 1980s.
This time, of course, it feels different. The Bank of England's £50 billion (or more) special liquidity scheme will either be seen in the coming months as doing the trick in helping to get markets moving again or a desperate last throw of the dice.

The scheme, which has the backing of lenders large and small, and will have their participation, deserves to succeed, and was not intended as a rescue operation for the banks or the housing market. Rather, if the economy is to come through the credit crunch, money needs to keep flowing and a downward spiral avoided. The Bank is acting as banker to the system.

That was also part of the spirit behind Royal Bank of Scotland's £12 billion rights issue. RBS is not battening down the hatches for recession but ensuring it has the capital base to keep lending flowing for growth. As Sir Fred Goodwin, its beleaguered chief executive, put it: "Were we not to have done the rights issue it could have impacted on our ability to continue doing business at current levels, and that in turn could have made the economy less good, which would in turn make our problems and other people's problems more acute."

How serious is the potential inflationary shock? One curiosity in recent months has been that as economic gloom has deepened with the credit crunch, weakening global-growth prospects, oil and commodity prices have surged.

Sure, the world's population is growing and eating better — those who can afford to — but we did not discover that over the past six months.

Yes, the global oil supply-demand situation is tight and the producing countries, including Saudi Arabia, no longer seem interested in a stable price. Again, though, that is not new.

So while there are fundamental factors that explain the end of the age of cheap food and energy, the suddenness of the rise in recent months points to a significant financial explanation. Investors have piled in.

Does that mean prices will reverse as quickly as they rose? The International Monetary Fund (IMF) looked at this in its world economic outlook this month and concluded that prices were likely to decline but only modestly, except in the event of a global downturn that spread significantly to emerging economies. Financial flows can, however, change rapidly.

The IMF also ascribed the weak response of oil supply to high prices to the politics of Opec (the Organisation of Petroleum Exporting Countries) and caution by the oil companies in increasing investment because of earlier episodes of very weak prices.

How big a problem are soaring commodity prices for Britain? One of a trio of Bank speakers in recent days, monetary policy committee (MPC) member Tim Besley, who voted against this month's rate cut, noted that "the world does appear to have become a more inflationary place of late".

All countries are experiencing the food and energy effect. Britain's inflation rate, however measured, remains low, including in comparison with the rest of Europe.

Besley's charts demonstrated that the relationship between commodity-price rises and general inflation is much weaker than it used to be. One reason is that the industrialised economies have become less industrial. Another is that tax and processing make up a high proportion of the final price. So, while the crude-oil price has doubled over the past year, petrol has risen by an average of 16% (diesel by a heftier 23%). Food prices, properly measured and weighted by the Office for National Statistics, have risen by 6%.

Another potential inflationary effect, from a weaker pound, was highlighted by Besley's equally hawkish MPC colleague, Andrew Sentance. The Bank, he insisted, had not abandoned sterling, which was still an important element in monetary policy.

The key issues were whether any rise in import prices led to so-called second-round effects on wages, and whether consumer spending remained subdued enough to contain firms' pricing power. The evidence on wages is encouraging, though consumer spending, on the official numbers, is probably too strong for the Bank.

What should we deduce from all this? Taken together with the minutes of the Bank's meeting this month, it is clear the MPC does not think it has lost control of inflation. Those who voted to cut (seven out of nine) were concerned that to not do so could lead to an inflation undershoot in the medium term. Those are not the sentiments of a central bank quietly abandoning its inflation objective.

Besley drew the distinction between previous episodes when commodity booms had spilt over into high inflation and the recent period. Back then, most notably in the 1970s, central banks allowed real (after-inflation) interest rates to turn sharply negative. The US Federal Reserve has negative real rates now but the Bank does not and doesn't want to.

That is why the markets were right to interpret the Bank's announcements and speeches in recent days as signalling a slower pace of rate cuts in future. But rates will fall further, and the first-quarter slowdown confirmed in official figures on Friday made room for them to do so.

Another speech, from the Bank's chief economist, Charlie Bean, talked of walking a tightrope between the credit crunch and inflation. Doing so, there is always a risk you will fall off in either direction. The best way of avoiding this, it seems, is to avoid sudden movements.

PS: How much does media coverage affect the economy? Can we "talk ourselves into recession", as business people often suggest to me?

Years into the "miracle" of low inflation and continuous growth, the economy was reported as being in trouble and the government disintegrating. Does any of that sound familiar?

From The Sunday Times, April 27 2008

Are we, like the Starship Enterprise, boldly going where we have never been before? Could we be approaching the equivalent of the point where Scotty, the engineer, warns that the "ship cannae take it anymore"?

I always hesitate to use the word unprecedented, but there is certainly something very unusual about present circumstances. Stephen Lewis of Insinger de Beaufort is one of the City's veteran economists and likens it to the 1973-4 secondary-banking crisis, but on a global scale.

Back then the Bank of England organised a £1 billion "lifeboat" for the beleaguered banks. Now it is on the brink of announcing a £50 billion rescue, intended to get the markets moving again by taking in some of the banks' mortgage-backed securities in return for more highly-rated gilt-edged stock. Whether there is a Plan B if it doesn't work remains to be seen.

One pattern is fairly constant. The banks overlend during the good times and rein back aggressively during the bad. That was the cause of the secondary- banking crisis and it extended the pain of the recession of the early 1990s, when the high-street banks were brutal in their treatment of small firms and when lenders were too quick to press the repossession button when homeowners fell behind with their payments.

This time the banks can claim that this is not a problem of their making. Unlike many previous crises, it did not arise within Britain. But they were happy to buy collaterised debt obligations and other dodgy assets originating in the American sub-prime market, which their boards did not take the trouble to try to understand.

More than that, there is a lack of remorse on the part of the banks that smacks of arrogance and insensitivity, though we may get a little contrition when RBS announces its rights issue this week. I have not agreed with everything that King has done during the crisis, but I would not blame him if he feels like dangling the bankers upside down from the window of his office until the change falls out of their pockets.

Whatever happens, the quid pro quo for the rescue must be that the banks play their part in stabilising the mortgage market and the wider economy. That means strengthening their capital bases, as RBS is doing. It also means lending feast should not be followed by permanent famine.

Are we in uncharted territory when it comes to the disconnect between the real economy and the financial economy? Last week brought news that the job market remains extraordinarily strong, with a rise of 152,000 in employ- ment in the December-February period. In the past year, employment has climbed by 456,000 to a record 29.51m.

This is another of those figures that, if you averted your eyes from the money markets and the gloomy headlines, you would be thinking described a very powerful boom. There are nearly 700,000 job vacancies, the highest since the current series began in 2001. The unemployment claimant count is at its lowest since June 1975. Confidence among consumers is very low but this, so far at least, reflects fear rather than reality.

Not for the first time, the figures did not get the coverage they deserved, drowned out by modest City job losses, gloom from Britain's chartered surveyors and the "news" that the government's official house-price measure fell in February; it always does. Some even tried to find bad news in the employment figures.

A better point, on the face of it, is that the job market is a lagging indicator and only signals problems when it is too late. In the lead-up to the last recession, however, employment matched the economy stride for stride, slowing in the run-up to the downturn but only falling from mid-1990 onwards, when the recession began.

The Ernst & Young Item Club's new forecast, to be published this week, predicts 1.8% growth this year, in line with the Treasury's estimate, and 1.5% next, below the Treasury. This will lead to a levelling-off in employment growth but only a modest rise in unemployment, it suggests.

The longer the credit crunch persists, of course, the greater the risk to jobs. Some of those directly affected in the financial-services industry and housing-related jobs will feel the pinch first, as Citigroup, UBS and Merrill Lynch are finding. But for the moment the overall job market reassures by its robustness.

Finally, there is always a bit of sport in seeing a prime minister on the rack, particularly one who gave his political opponents such a tough time when he was chan- cellor. There are, however, some strange charges flying around.

One is that under Brown the government bent over backwards to boost the housing market and we are now paying for it. Sorry? Under Brown at the Treasury mortgage-tax relief was abolished and stamp duty raised to punitive levels, particularly on more expensive properties.

If people mean that Labour should have reintroduced credit controls — something that would have been condemned as a return to the 1970s and impossible without the reintroduction of exchange controls — they should say so. If they mean that the Bank should have kept interest rates at levels that would have given us slower growth, higher unemployment and a big inflation undershoot, that is a pretty strange set of priorities too.

I note that Germany, which did not have a housing or consumer boom, is suffering falling house prices. The Hypoport index for existing home prices is down by 7% on a year ago.

The other bit of nonsense concerns the switch of the inflation target to the consumer-prices index (CPI) five years ago. This, apparently, took the Bank's eye off the ball because CPI, unlike the retail-prices index, does not include a house-price component.

Yes, it was a daft thing to do, because nobody much believes in the CPI. But I cannot pinpoint a single interest-rate decision since then that would have been different had the old target (RPI excluding mortgage-interest payments) remained in place. The Bank is a bit brighter than it is given credit for.

PS: The rise in food and oil prices in recent days to new records partly reflects supply and demand, though I would take issue with the chap writing in the Financial Times who suggested last week that we had hit a peak for world oil production. International Energy Agency figures show that output is up by 2m barrels a day on two years ago and by 4m on four years ago.

In the meantime, the financial tail wagged by the hedge funds and investment banks in their greedy search for returns will continue to produce nasty economic and social consequences. Making money out of people's desperate shortages of food is obscene, a bit like wartime profiteering. It's enough to turn the prime minister back into a socialist.

From The Sunday Times, April 20 2008

Gloom, gloom and more gloom. Gloom from Washington and the International Monetary Fund (IMF). Gloom from Halifax, West Yorkshire, on the housing market, of which more below.

Even the Bank of England's quarter-point cut in interest rates was gloomy, given it was forced into this by what it described as "worsening" credit conditions. Seldom has a rate cut been greeted with more of a shrug, or such a widespread perception that it will make no difference.

Can I say anything to lift the gloom? Let me start with the IMF. Its latest world economic outlook, published to coincide with the spring meetings it co-hosts with the World Bank, did indeed have some scary language.

"The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression," it said, and there was now a one-in-four chance of a global recession, something it had dismissed last year as barely worth mentioning. It calculates that global losses from the credit crisis will hit $945 billion (£480 billion).

This is enough to give anybody nightmares. The losses, equivalent to more than a third of Britain's annual gross domestic product, are significantly up on earlier estimates. Talk of the Great Depression is, if not alarmist, certainly alarming.

Let us be clear, however, that the IMF is not predicting such an outcome for the world economy. America's economy shrank by some 32% over the 1929-32 period. In contrast, its prediction for the next couple of years is growth of 0.5% and 0.6% respectively. That is uncomfortably weak for Americans, but implies only a mild recession.

This is also true of the IMF's global forecast. Five years ago, when the Iraq invasion appeared to have gone well, its world economic outlook was upbeat. The global economy, it suggested, would grow by about 4% a year over the following three to four years.

It was not a bad forecast but it was too cautious. In the event, the world economy managed 5% annual growth over the 2004-7 period, the best for three-and-a- half decades.

But keep that 4% in mind — it's close to what the IMF predicts for the next couple of years (3.7% and 3.8% respectively).

What was strong a few years ago looks weak in the context of the global economy's recent performance. But 3.5% to 4% growth is still pretty good, and far stronger than during recent world recessions, around the turn of the millennium and in the early 1990s.

It feels gloomy because the balance of global growth has shifted away from the advanced economies. Divergence rather than decoupling is the new buzz word and it is also the new reality.

While advanced economies will grow by 1.3% this year and next, emerging and developing economies will expand by 6.7% and 6.6% respectively.

The fact is that the credit crisis is hitting the West hard, while China, India, Russia, sub-Saharan Africa and the Middle East are all booming.

If you are in America, with barely any growth, or Italy, with today's election being fought in an economy predicted to grow by only 0.3%, things feel grim. In China, 9.3% growth, or Russia, 6.8%, policymakers are more worried about inflation than recession.

As for Britain, the IMF's forecast of 1.6% growth for this year and next is stronger than America, plainly, but also outstrips Germany, France, Italy and Japan. It may not be a great prize to win, but over the next two years Britain will vie with Canada to be the strongest-growing economy in the G7. That does not fit the description of a country acutely vulnerable to the credit crisis. The fact that Britain is seen to be growing more strongly than Europe is also hard to square with sterling's slide against the euro, though the single currency's strength will be a constraint on euroland growth.

It could be, of course, that the IMF is still too upbeat on the global economy. Simon Johnson, its chief economist, conceded last week that it had been last year but maintained that the organisation had learnt a lot about the effect of the crisis.

Certainly there is no indication in its report that it has tried to minimise the impact. And there is no evidence that the world economy, while damaged by the crisis, is about to go pop.

Here, the Bank's monetary policy committee, when it sat down to consider its rate verdict on Thursday, was caught between a rock and a hard place.

Had it not cut, any mild satisfaction it could have obtained by not bowing to some obvious political pressure from Gordon Brown would have been lost in the criticism it would have had from all quarters for sitting on its hands. Had it cut by half a point, people would have interpreted it as capitulation and panic. Its task remains that of preventing a downward spiral.

Credit crises, when you are in them, appear both permanent and terminal. But they do pass. The IMF usefully lists past examples. In Britain, the last time there was a credit squeeze associated with a banking crisis was in 1975-76, and it lasted about six months.

Other credit squeezes happened in 1966-67, lasting nine months; 1991-92, 15 months; and 1993-94, 18 months. This one, dated from the moment it broke into the open, is about seven months old. If it runs on until the end of next year, as some predict, it will be very long by past standards.

By then, of course, the Bank should have cut rates a lot more. It may even do so again next month.

PS: If it's not yet time to throw in the towel on the world economy, what about Britain's housing market? Surely Halifax's shocker — a 2.5% drop in house prices last month alone — was confirmation we are in an almighty crash?

What is the true picture? Housing activity is down sharply and prices, I think, are slipping, but the lenders' indexes seem to be overstating it. It may be this is just a stay of execution and soon every measure will be going the way of the Halifax. But let's wait a while before declaring that the crash has started.

From The Sunday Times, April 13 2008

The brightest minds in central banks, finance ministries and the private sector are fully engaged in ending the credit crunch.

It will be the focus of the International Monetary Fund and World Bank's spring meetings in Washington this week. Things have moved on since their autumn gathering. Now most economists think America is in recession and "normalisation" in financial markets is a long way off.

These issues are fiendishly complicated. Few can be addressed by one country alone. When the dust settles, banks can expect to be more tightly regulated than before, because through a combination of greed and incompetence some fell down on the job.

The Financial Stability Forum will report to G7 finance ministers and central banks this week. In an interim report in February, it said: "Events have shown that the quality of risk management varied significantly among the largest and apparently most sophisticated market participants."

The regulatory response will come later. What should be happening here and now? The crunch is the result of a series of market failures. It is the job of policy to try to offset such failures. Here are some suggestions how.

Interest rates should be cut

The Bank of England's monetary policy committee has pursued a cautious line on rate cuts, steering between slowing growth and higher inflation. That has been right so far, but there is now a case for more aggressive action.

The problem is the renewed rise in money-market rates, with three-month Libor (London interbank offered rate) at nearly 6% and lenders increasing their rates when the trend for official rates is down. The Bank should cut and, if necessary, cut again, until rates across the economy are falling.

The "shadow" monetary policy committee, which meets under the auspices of the Institute of Economic Affairs, agrees. It votes 6-3 this month to cut rates, with one member, Patrick Minford, opting for a half-point reduction.

Minford and the other cutters — John Greenwood, Ruth Lea, Kent Matthews, Peter Spencer and Peter Warburton — had a similar message. While hard evidence suggests the economy has weakened only slightly, the tightening of credit conditions, confirmed in the Bank's own survey, points to significant downside risks and the need for action.

As Minford put it: "The Bank needs to take action to cut money- market rates (not Bank rate which is now increasingly irrelevant) by around 1%, with a further bias to easing. The aim should be to get market rates down to 5% now, ready for further falls."

Of the other shadow members, Tim Congdon and Trevor Williams had a "bias to ease", but not now. Only my near namesake David B Smith has a bias to raise rates.

The Federal Reserve has cut aggressively and will do so further. What about the European Central Bank? There is admiration for the ECB's anti-inflationary stance, so it is easy to forget it has a bigger inflation problem than Britain. Its inflation ceiling is supposed to be 2% but the flash estimate of March inflation was 3.5%, not far below the official 4% interest rate. That has happened despite the helpful effects of a strong euro. Even so, the ECB will eventually have to look through current high inflation, which slower growth will take care of, and cut.

Liquidity operations should be stepped up

As well as cutting rates, central banks must continue to flood the money markets with liquidity and against a wider range of collateral. The Bank insists it is doing plenty, and its actions compare favourably with the ECB and the Fed, though critics disagree. In the present situation you can probably never do enough. Since the crisis broke, banks have on average wanted 4.5 times the liquidity the Bank has been prepared to supply, a higher level of "cover" than usual.

Direct intervention as buyer of last resort for mortgage-backed securities

The credit crunch is a result of the parcelling up of mortgages into tradeable securities. Its continuation reflects the fact that many of these markets for asset-backed securities have stopped operating. This is market failure on a large scale.

Central banks could stand aside and wait for markets to open up again, but that will take too long. For markets to kick into life, what Bank governor Mervyn King described recently as the "overhang" has to be tackled.

This does not mean the Bank or other central banks should subsidise new mortgage-backed securities. It does mean the authorities should be prepared to mop up the overhang by taking them on to their books, and for longer than just a few weeks. Buying them at distressed prices now would allow the banks to close the books on their losses. The taxpayer should make money out of the deal in the medium term.

Direct intervention as lender of last resort in the mortgage market

I have left the most controversial until last. In the UK mortgage market, part of what is happening is that lenders are sensibly scaling back in response to a weaker market. There is, however, also an element of market failure, particul- arly affecting first-time buyers.

The number of lenders has shrunk — a situation exacerbated by Northern Rock's determination to run down its mortgage book and repay the taxpayer — but nobody wants to increase market share. Mortgage approvals stabilised in February at 73,000 but could fall further. The result, if unchecked, could be a downward spiral of lending. The deep housing recession the authorities are keen to avoid could become a reality.

There is nothing radical about mortgage lending by government. In the 1960s and 1970s, building societies and local government vied for mortgage-market share. The Post Office, a nationalised industry, offers a range of mortgage products in association with Bristol & West. There are small-scale official schemes for key workers and others.

The government, unlike banks, would find raising finance straightforward. The Treasury, keen to switch homebuyers to long-term mortgages of up to 25 years' duration, could do so directly, perhaps offering only long-term mortgages. Could it happen? The lenders would squeal and ministers might regard it as bit too 1970s. But there is a market failure here, and it is close to home.

PS: Despite all the coverage last week, and the presence of two former chancellors (Lamont and Lawson), a former Bank governor (Lord Kingsdown) and other luminaries, the House of Lords economic affairs committee did not answer the question it set itself. Does large-scale immigration generate significant economic benefits for the domestic population? The answer, according to their lordships, is that there is "no evidence" it does.

If that is right, it seems like too many for these crowded islands. If the government has got it wrong, and all we are seeing is a temporary inflow, important long-term decisions are being made on a false premise. These are important issues, which the Lords are right to put on the agenda.

From The Sunday Times, April 6 2008

With apologies to any of them who might be reading this, is it time we dumped the investment bankers, accountants and consultants and concentrated on the people who make things, Britain's manufacturers?

Does the credit crunch — a term Mervyn King has now taken to using — mark the point at which we should go back to basics, by rediscovering the things that made Britain great? A week in which Jaguar and Land Rover have been sold to India's Tata may seem a curious time to be asking such a question.

That sale, however, just exchanges one foreign owner, Ford, for another. And unless Tata plans to ship the whole lot to Mumbai, which it shows no sign of planning to do, the sale should be regarded as an expression of confidence in UK manufacturing.

Can manufacturing revive? Should it, or should we accept that while the credit crunch has dealt a short-term blow to financial services, and sullied the reputations of some of the masters of the universe in the City and Canary Wharf, that is where Britain's advantage lies?

When Labour came to power more than a decade ago, the City had reasons to be nervous. Despite the charm offensive that preceded Tony Blair's election, there were uncertainties over how City-friendly a Labour government could ever be and about how rapidly it would want to take the country into the euro.

Those fears were groundless. Despite the current qualms over the taxation of non-doms, new Labour presided over a golden age for the City. Manufacturing, in contrast, has struggled, losing more than a million jobs. In the past 10 years manufac- turing output has risen by 2.8% — in total, not per year. The output of business and financial services, which has twice the weight in gross domestic product as manufacturing, has risen by 57%. Pushing paper has been a lot more profitable than moving metal.

If we take financial services on its own, its rise mirrors manufacturing's fall. IFSL (International Financial Services London) records that its share of GDP has increased from 6.6% to 9.4% since 1996, during which time manufacturing has dropped from 21.1% to 13.2%.

This is a tale of two sectors, and it is also a regional story. Nearly 22% of London's GDP is accounted for by financial services, compared with under 5% in northeast England. That does not mean, incidentally, that more than a fifth of London workers are employed in the City and Canary Wharf. "City-type" employment, 338,000 according to IFSL, is relatively small, accounting for only just over 1% of all jobs in the UK. The "City", including Canary Wharf, contributes 2%-3% to the British economy, not as much as is commonly supposed.

There will be some shrinkage over the next year or so in City-type jobs. The broader financial-services sector, similarly, faces much weaker growth. To what extent can manufacturing take up the slack? Nobody would be more pleased than me, given my West Midlands roots, to see it happen. The good news is that 2007 was a strong year for the sector, one of the best for a long time, and the evidence so far this year is encouraging.

The CBI's measure of export orders currently equals its best level since 1995, helped by the pound's fall in recent months against the euro. That fall, given something like official endorsement by the Bank of England last week, recalls the all-too brief flowering of UK manufacturing in the wake of sterling's September 1992 departure from the European exchange rate mechanism.

A report, Global Challenge, by the Engineering Employers' Federation (EEF) and accountants BDO Stoy Hayward, found that Britain's manufacturers were responding positively to the challenges from China and India.

Many UK firms are now niche players but most have adapted to years of intense global competition and, until recently, a strong pound. Productivity growth in the sector is stronger than in the rest of the economy, and has had to be.

Three-fifths of manufacturers in Britain locate their research and development activity here. Most rely on a diverse range of markets, limiting their vulnerability to America's problems or a consumer downturn in Britain. Even with Libor (the London interbank offered rate) at 6%, manufacturers will feel the impact of the credit crunch less than other sectors.

Steve Radley, the EEF's chief economist, even has some "man bites dog" evidence of a return of some manufacturing activity to these shores from low-cost locations like China. High transport costs, coupled with quality and reliability problems have led to demands from some customers for production to be located closer to home. It is too soon to say it is a trend but it is an encouraging development.

John Hutton, the enterprise secretary, thinks that the revival of nuclear power has the potential to generate 100,000 skilled manufacturing jobs in Britain. Hutton also sees a new wave of what he describes as "green collar" jobs, those related to the design and manufacture of low-carbon, environmental products.

There is, however, an enormous way to go. The sheer scale of Britain's manufacturing trade deficit underlines the depth of the problem. Last year manufacturing trade was in deficit by £61 billion, of which £55 billion was in finished goods. A return to the situation of a quarter of a century ago when manufacturing trade was in surplus (and always had been) looks inconceivable. The financial- services sector, in contrast, runs a surplus of £25-30 billion.

Not only that, but history is not on manufacturing's side. The EEF hopes for a stabilisation of its share of Britain's economy but is cautious about predicting a rise in that share. There is no known instance of manufacturing in any country permanently reversing the natural decline that is associated over time with a bigger share for services. Rules, of course, are there to be broken. It would be good if British manufacturers could break this one.

PS: With the Nationwide reporting a fifth successive fall in house prices, immediately and clumsily after an increase in the rates it is charging new borrowers, memories are stirring of the early 1990s. In prime minister's questions, Gordon Brown claimed rates rose to 18% then, while Nick Clegg, the Liberal Democrat leader, said the rise by the Bank of England recently was proportionately the same as then.

What about an April rate cut, or will the monetary policy committee wait for its inflation report in May? I had thought May but April is coming up fast and starting to look irrestistible. More on this next week.

From The Sunday Times, March 30 2008

IF you can keep your head while others are losing theirs, better not shout about it in today’s environment. What would Rudyard Kipling have made of a frenzy that has taken us from the possibility of recession to a re-run of the Great Depression in days?

We should treat talk of another Great Depression with a similar pinch of salt as when it was predicted after the 1998 global financial crisis and the September 11 attacks on America in 2001. But if those who ignore the lessons of history are condemned to repeat mistakes, nobody knows better than Fed chairman Ben Bernanke the lessons of the Great Depression era — you do not allow the banking system to implode and compound the problem with a protectionist trade war. Even if the historical parallels were appropriate, which I think they are not, the lessons have been learnt.

As an aside, many people think the Great Depression was the source of the observation that, if America sneezes, Britain catches a cold. That was not the case. America’s gross domestic product (GDP) fell by about a third from 1929 to 1932, while Britain’s dropped by only 5%, followed by the long upswing to 1938.

It was grim, particularly up north, although the 1930s was also a time when the consumer age flowered. Many of those three-bed semis that make up our suburbs were built, UK car output rose fivefold between 1924 and 1937, and electric cookers, vacuum cleaners and washing machines began to come within the reach of ordinary families.

If not depression, then, what about recession? Britain is just approaching the end of a quarter in which GDP will probably have grown by 0.4% or 0.5%, down only a little from the 0.6% recorded in the final three months of last year. This will be the 63rd consecutive quarter of growth.

Growth has slowed but no more than anybody expected. Indeed, the evidence of recent days points to an economy which, if not booming, is defying any crisis. Retail sales rose by 1% last month, following a 1.1% increase in January, and are up by 5.5% on a year earlier.

The figures will have come as news to many retailers, for whom life is a struggle, but suggest the consumer is a long way from collapsing. Manufacturers are experiencing a healthy rise in orders, particularly in export markets, according to the CBI. Its measure of export orders has just equalled its best reading since 1995 and price pressures are persisting.

Is the job market buckling under the impact of the credit crunch? It has not happened yet, despite some evidence of job losses in financial services. Employment overall rose by 166,000 in the three months to January and unemployment dropped by 32,000. The claimant count continued to fall last month.

It is not stretching it too far to say that, if the Bank of England closed its eyes to the credit crisis, it might be thinking of raising interest rates rather than cutting them further. Everybody thinks employment and unemployment are lagging indicators but the experience of the last recession is instructive.

Unemployment was flat for the first half of 1990 and began to fall in the middle of the year, the point when GDP began to decline. So the economy is holding up, despite weakness in housing and financial services. Will this change?

Sir Alan Budd, former government chief economic adviser, likened the experience in 1990 to a cartoon character running off a cliff and suddenly finding there was no means of support. Could history repeat itself?

The three recessions Britain suffered between 1973 and 1992 had a common characteristic. In each case interest rates were raised sharply to curb inflation and, in the case of the 1974-75 and 1990-92 recessions, to end an unsustainable boom. By the time rates were cut, the economy was already in recession and it was too late.

This time interest rates are on the way down at a time when the economy is still growing. But could it be that the squeeze the credit crisis is imposing on the economy will not only make the Bank’s efforts futile but will snuff the life out of the economy?

Do we have the private sector — the banks and the financial markets — in effect running monetary policy? It is a point of view, and certainly the pass-through from rate cuts by the Bank is more muted than usual because lenders are rebuilding their profit margins.

There still is an effect, however, in the sense that interest rates available to borrowers are lower than they would be in the absence of Bank action. The lower pound, highlighted by exporters as helping them significantly, is also an important transmission mechanism.

In the end, though, modern economies run on credit and if credit suddenly dried up, they would stop growing. Fortunately, and contrary to some of the things you may have read and heard, that is not happening. Credit is certainly tougher to get hold of for some borrowers and will be for some time, but there is still plenty around.

Figures from the Bank last week showed just how much. The broadest measure of lending in the economy, M4 lending, rose £16.4 billion last month, up 12% on a year earlier. Another measure, excluding the effects of securitisations, rose by £19.3 billion for a 13.7% growth rate. M4 itself, the “broad” money supply, is growing by 12.3%.

These are the kind of numbers that have monetarists worrying about boom, not bust. They do not suggest the lending taps have been turned off. We should not ignore the challenges the economy faces. It would be good to see one group of “investors”, commodity speculators, take a real bath rather than the mild soaking of recent days. A big fall in the oil price would be of considerable help. But this is not the time to dust off the depression and recession primers.

PS: The release of figures showing a rise in inflation and the annual shake-up in the index “shopping basket” — muffins and smoothies in, CD singles and 35mm film out — brought a strange response. I swear I heard a woman on breakfast television say the consumer prices index (CPI) gives iPods as big a weight as food and fuel. Some claim “true” inflation is in double figures.

It will not, however, prevent the monetary policy committee, which voted 7-2 to leave Bank rate on hold this month, cutting again soon.

From The Sunday Times, March 23 2008

The government's advisers sometimes yearn for the "white coat" effect. The idea is that trust in politicians is so low that you need an expert, a man in a white coat, to convey information to the public.

I thought of the men in white coats when listening to Alistair Darling presenting his budget last week, and not to summon them to take him away. His task was to convince the public that Labour's economic management has left the economy "resilient" and well placed to cope with shocks like the dangerous credit crisis sweeping through the world financial system.

The Tories, on the other hand, were anxious to prove 11 years under this government has left the Treasury without a bean and that the economy is only a downturn away from becoming a banana republic. David Cameron, quoting the CBI out of context, used those words in his budget response.

Adjudicating in this debate is not easy, though given some of the over-the-top attacks on Darling in some of the dailies after the budget — Attila the Hun often got a better press — I am more than usually inclined to side with the underdog.

But if I side with the chancellor I will be accused of being a Treasury/Labour stooge, while if I take the Cameron line I will be attacked for being a Tory one. Don't worry, I've had both.

Part of the problem is that politicians are politicians, and never admit to any achievements by their opponents. So Darling referred in his speech to Britain's economy "growing continuously for over a decade". Over a decade, as he knows, is more than 15 years, 62 quarters, and started when Cameron was a callow youth advising Norman Lamont. The Tories, similarly, are required by convention to paint the Labour era as a disaster.

So how to settle whether the economy is well-placed or not? Let me turn to a man in a white coat, Andrew Gurney, Treasury official and author of a report, Resilience in the UK and other OECD economies, published alongside the budget.

Although a working paper rather than an official Treasury document, it has been passed around most senior officials for approval. I get the sense that the Treasury is fed up with all the criticism. Whatever happens now, after all, the record on growth, inflation and employment of the past 15 years is the best in living memory.

Gurney examined Britain's performance in two periods, 1982-93 and 1994-2005, in comparison with 13 other advanced-country economies. The conclusion, which followed an earlier OECD verdict that Britain has had the most stable growth and inflation of advanced countries in recent years, was that the UK was also the most resilient to shocks, such as the Asian, Russian and hedge-fund crises of 10 years ago, the bursting of the dotcom bubble, September 11 and so on.

The reason, though the paper does not say so explicitly, is the Thatcher supply-side reforms of the 1980s combined with much better macro management, in particular targeting inflation, from the early 1990s.

Is the man in a white coat right? There is a caveat, known to any- one who has ever seen a unit-trust advertisement, which is that "past performance is not necessarily a good guide to future outcomes".

But the paper does expose the nonsense of the Tory suggestion that somehow Britain is uniquely exposed to the dangers of the credit crisis. Do they really think that Japan, still to recover properly from the bursting of its bubble economy two decades ago, is better placed? Or Italy? Or over-regulated France?

Budgets, in terms of their impact on the economy, are much less important than they used to be. Chancellors can do damage, as Darling discovered with his pre-budget report in October. But the individual measures unveiled last week, which will amount to a fiscal tightening of £1.9 billion in two years' time, and sensibly none now, were inoffensive enough. We can debate whether higher taxes on alcohol and on gas guzzlers will change behaviour but it is hard to argue against them per se.

Where budgets are important is in the message they send out about the economy. Darling has decided that the credit crisis, which the Treasury does not expect to be fully over until mid-2009, will slow the economy but not derail it.

His predictions of 1.75%-2.25% growth this year, 2.25%-2.75% next, are in that context. He could have gone lower for 2008 but to have done so would have taken him below the consensus, which is 1.7% this year, 1.9% next (the lower number in the Treasury's forecast range is always the one it expects).

There is even a view among officials that some of the gloom may have been overdone. While emphasising the downside risks, it says: "With UK private business survey indicators pointing to the economy carrying momentum into 2008, and the possibility that GDP growth in the euro area may exceed current expectations, there are also upside risks to the . . . growth forecast."

What about the dire state of the public finances? Gordon Brown did indeed spend recklessly and leave little for a rainy day, as the Tories have said. I am not in favour of emergency fiscal action but targeted help for first-time home-buyers such as a lifting of the stamp duty threshold, as widely advocated (and proposed by the opposition) would have been timely.

The real problem for the public finances, however, is that Brown's beloved fiscal rules are not fit for purpose. There is nothing magic about a government debt ceiling of 40% of gross domestic product, which is low by international standards. But there is something wrong when the Treasury is obliged to move heaven and earth to keep the figure below 40% (it gets to 39.8% in the latest projections) when everybody knows the true figure is higher.

The bigger problem is with the golden rule, which allows too much borrowing at all times. Crudely, the golden rule means that public borrowing equals public-sector investment. The latter is scheduled to rise to £41 billion by 2012, implying that this becomes the "normal" level of borrowing.

Darling made a start to restoring the public finances when he sneaked in that next year's spending review would aim for tight growth in public spending, 1.9% a year in real terms from 2011. That, if achieved, will mean five years in which spending growth is held at roughly 2%; below the rate of growth of the economy. The Tories would call it sharing the proceeds of growth. I call it good housekeeping. And it is a much more sensible rule.

PS: Ask why Britain had such a long run of low inflation and many will mention the "China effect" — cheap imports from the People's Republic. With Chinese inflation running at a 12-year high of 8.7% last month, perhaps we should be worried, particularly with Bank of England figures showing rising public inflation expectations.

As for the future, some businesses say China's inflation, though concentrated in food, could make them switch production elsewhere — in which case we'll hear less about the China effect anyway.

From The Sunday Times. March 16 2008

Ties say a lot about a man. If you are feeling down you pick out the dullest one from the wardrobe, hoping nobody notices you. When you are bursting with confidence, on the other hand, the more garish and flamboyant the better.

So what should we make of the fact that, flanking Gordon Brown at prime minister's questions last week, Alistair Darling was wearing a particularly bold, striped number? Is the chancellor, emboldened by having got away politically with the nationalisation of Northern Rock, overflowing with confidence? Can he pass on any of it to the rest of us?

Brown, even when announcing big increases in borrowing, usually conveyed the impression the economy was in safe hands. It may be because budgets are in spring, a time of hope and renewal, but when successful chancellors sit down the world somehow seems a more optimistic place.

That will not be easy for Darling this week, but not impossible. The budget starts with the outlook for the economy and the public finances. In October, in his first pre-budget report, he lopped half a point off the Treasury's growth forecast for 2008, establishing 2% to 2.5% as the new range.

Even that now looks ambitious. Each month the Treasury puts together a compilation of independent forecasts. The average of new forecasts is just 1.7%, which would make this the weakest year since 1992. The Bank of England has revised down its forecast since November.

Does Darling tough it out, or take the political flak from another downward revision on the chin? As importantly, can he leave the Treasury's growth forecast for 2009 — a speedy return to trend growth of 2.5% to 3% — unaltered?

He can blame the rest of the world: the Organisation for Economic Co-operation and Development is revising down its forecast for advanced countries' growth this year to below 2%. Britain, though, is holding up. Consumer spending is at best mixed and the housing market weak, but purchasing managers' surveys for manufacturing and services — reliable indicators — are up. The way the numbers work, a solid first quarter would make 2% growth this year achievable, though at a stretch.

So, given that one aim of the budget is to instil confidence, expect a downward revision to growth but only to a limited extent. What about the public finances? Strong January tax receipts have eased pressure to revise up the public borrowing figures significantly. But the chancellor needs the economic downturn to be short-lived to prevent some scary borrowing figures.

Darling can for now leave the £100 billion or so of Northern Rock debt off the government's books, though it is only a matter of time before the Office for National Statistics revises its figures and he will be forced to do so. The ONS suggests it will add the equivalent of at least 6.7% of gross domestic product to government debt, currently 35.9% of GDP, taking it above the official 40% ceiling.

He will also have something specific to say about housing. As he foreshadowed in a speech last month, the Treasury plans a new "gold standard" for mortgage-backed securities, intended to unfreeze the market and get funds flowing again. There may be other action directed at housing. A housing slowdown is welcome, but Darling, having insisted the UK market is in much better shape than America's, does not want anything worse.

Many businesses, it should be said, are less interested in the big budget picture than the finer detail, covering everything from the taxation of foreign dividends to a proposed Revenue clampdown on so-called "income shifting" between husbands and wives in small businesses. There remain concerns about Darling's proposed changes to the taxation of "non-doms" and capital gains.

The Treasury's line is that those concessions are about all business should expect. Though officials maintain they remain committed to consulting with business on tax changes, Darling will have to work hard to undo the damage of last October's pre-budget report.

As Paul Davies at Ernst & Young, the accountant, puts it: "It's not too late, but the chancellor has a long way to go if he's going to inspire confidence in the eyes of UK businesses."

Darling will make much of the drop in the main rate of corporation tax from 30% to 28% in April, one of 30 changes left by his predecessor, though rather less about the rise in the small companies rate. In April, too, the basic rate of income tax will drop to 20%, though the 10% starting rate will also disappear.

There will be a green element to the budget. The chancellor has already announced that a new "per plane" aviation duty will be introduced next year, replacing the existing air-passenger duty. He will act on the recommendations of Julia King of Aston University on low-carbon cars.

This is intended to push manufacturers into reducing CO2 emissions by up to 30% using existing technology. There will be measures to help this along, though Brown's last budget included a rise in vehicle excise duty on high-emitting Band G cars to £400 from next month. Deferring the 2p-a-litre April rise in petrol duty, which will push a gallon closer to £5, would be popular with motorists but go down like a lead balloon with the green lobby.

The chancellor also has the tricky task of steering through the minefield of alcohol taxation. As a Scot, does he end the freeze on duty on whisky and other spirits and hit middle-class wine imbibers in the hope of deterring a few teenage binge drinkers? There have been suggestions that he might, but Treasury signals, as always, are hard to read.

These details and others are interesting and important, so the call by Richard Lambert of the CBI for a six-paragraph budget that does nothing will fall on deaf ears. Even beleaguered chancellors do not pass up on their big moment.

It would be nice if the chancellor took up another idea, the 2-plus-2 rule suggested by the Institute of Directors, of marrying the 2% inflation target with a permanent 2% limit on the annual real growth of public spending. Over time, the IoD says, this would cut public spending from 42% to 35% of GDP and free up resources for lower taxes. I suspect, though, shorter-term considerations will prevail this week.

PS: With oil hitting $105 a barrel, inflationary pressures are a global problem. China's premier, Wen Jiabao, told the National People's Congress last week rising prices were a big concern and the authorities would sacrifice some growth to deal with them. The official growth target this year is cut to 8%, compared with the 11.4% expansion last year.

China's economy, at present less than a quarter of America's at market exchange rates, will by 2050 be 30% bigger, and nine times Britain's economy. India will be smaller than the US but seven times the size of Britain. We will still be richer; per capita incomes here will be twice those in China by the middle of the century — but with the gap closing fast. At market rates, UK incomes are now 17 times those in the People's Republic.

From The Sunday Times, March 9 2008

A few weeks ago I said I would look at transport and the problems road congestion and overcrowded and unreliable public transport caused for the economy. The phone, metaphorically speaking, has not stopped ringing.

This is a subject many feel passionate about. There is much to say and I can only scratch the surface. If transport does not work, businesses struggle and our quality of life suffers. Nationally, according to official figures, we make 61 billion journeys a year, more than 1,000 a year for every person.

My feedback confirms the problem is most acute in regions with the biggest concentrations of population: the southeast, West Midlands and northwest. But many other areas also suffer unacceptable levels of delay and inadequate public transport.

Road congestion costs the economy an officially estimated £7 billion to £8 billion a year, according to the Department of Transport. Unofficial academic studies put the figure as high as £21 billion annually. I would not be surprised if even this was an underestimate. This is because, while it is possible to measure the direct effects of transport inadequacies, the indirect effects are harder to gauge.

The government-commissioned transport study carried out by Sir Rod Eddington found that a 5% cut in travel time would save business £2.5 billion a year.

One powerful strand of feedback related to the M4 corridor, an area of huge economic importance to Britain. International executives, it seems, are increasingly disenchanted with that location, the horrors of Heathrow being compounded by the stop-start motorway journey at the end of it. Nobody wants that after a long flight from California or, similarly, on the way to catch a plane.

Transport also features high on the list of gripes from businesses about London, again hugely important economically. Many of those footloose businesses that are not driven away by Darling’s clumsy nondom tax will, it seems, be persuaded to move by the capital’s transport failings.

One of the people I heard from was Peter Hendy, London’s transport commissioner under Ken Livingstone, the beleaguered mayor. He is honest in his appraisal of the situation.

The public-transport statistics, he says, give no impression of a city haemorrhaging people or suffering a downturn; bus-passenger journey numbers in January were up 6.1% on a year earlier; the Tube by 6.5%. The alarming overcrowding on the network is genuine. Investment in longer and more frequent trains and better signalling will help, but take time.

When it comes to roads, the prognosis is gloomier. He concedes that the central London congestion charge has not increased traffic speeds because other factors, notably digging up roads to replace old gas and water mains, have slowed them down. The best he can claim is that, without the charge, things would be worse.

A lack of joined-up thinking is built into the system. Transport for London controls only 5% of the capital’s roads, the strategic routes, with the rest the responsibility of the boroughs. If they do not coordinate their work, the result is chaos.

Hendy can offer no comfort on infamous traffic blackspots such as my bête noire, the Blackwall tunnel. Once the police introduced new safety restrictions, the transport authority was powerless to intervene. Things will not get better until there is another London river crossing, and that is not even on the drawing board.

Across the country there are problems like this. Dual carriageways end abruptly and become low-speed, single carriageways. Dreadful bottlenecks result when motorway traffic joins a road like the A14 in Cambridgeshire, or where there is no motorway at all, such as the A11, also in East Anglia.

Diagnosis of the problem is easy. For decades Britain underinvested in roads and transport generally. We have the worst of both worlds, inadequate road capacity and poor public transport. Last week Network Rail was fined £14m for taking out vital bits of the network over the Christmas and new-year travel period. Road users pay £32 billion a year in tax but only £8 billion of that is spent on improving and maintaining the system.

What’s the solution? The first part, recommended by Eddington, is to tackle obvious bottlenecks in the system, where a small amount of investment will go a long way.

The government published a response to Eddington last autumn, and a green paper is promised this spring, but I don’t hold out much hope. In the end, the answer is much more investment, in public transport and the roads.

A recent report from Policy Exchange, the think tank, Towards Better Transport, made a convincing case for building new motorway links first, through PFI (private finance initiative) projects, then introducing charging on them. It stated: “Travellers would then see clear evidence of the direct benefits of road-user charging and understand that a significant share of future revenues was being spent on transport rather than being absorbed by the Treasury for general expenditure.”

The closest you get to French-style motorway nirvana in Britain is the M6 toll road, though it isn’t cheap. It is a scandal that it remains unique, 25 years after it was first mooted.

If there is clear government policy on road-pricing, apart from leaving it to local authorities, it is hard to detect. People and businesses would be prepared to pay for congestion-free journeys. That is the long-term solution to a genuine and growing problem for Britain’s economy. Allow the private sector to build more motorways, and to charge for them. Otherwise, the economy will jam up.

PS: Despite a 0.5% drop in house prices and evidence from the CBI that February was a struggle for retailers, this does not seem like a month when the Bank of England’s monetary policy committee should or will cut interest rates. I still think in terms of May for the next one.

That is true, though figures for gross domestic product in the final quarter showed clear slowdown signs. Growth was unrevised at 0.6% but consumer spending rose only 0.2%, and the GDP rise was supported by a big rise in inventories. Weakness lies ahead.

From The Sunday Times, March 2 2008

(8)

Timing is everything in this game. Within hours of last Sunday’s piece, saying one key element of Alistair Darling’s recovery plan should be avoiding the nationalisation of Northern Rock, he was announcing that very thing at a hastily convened Treasury press conference.

A week on, I have not changed my mind that it was the wrong thing to do. It appears that once the Office for National Statistics had decided Northern Rock’s debt had to go onto the government’s books come what may – guaranteeing that one of Gordon Brown’s fiscal rules would be broken – the game was probably up for the private-sector solutions.

If the private sector could not take on the risk, it was not going to be allowed to get its hands on the return. The Treasury, in pursuing the private-sector option until last weekend, may have been going through the motions.

The question of whether the proposals from Virgin or the Northern Rock board could have generated greater long-term value for taxpayers went out of the window, sent packing by the political fear that in a few years’ time Sir Richard Branson would be partying off the profits on Necker Island.

It may be that Ron Sandler, Northern Rock’s new nondom executive chairman, and his team will do a great job. He has called in McKinsey, the consultants, which some will applaud, others not. But many talented business people have foundered in the public sector – Whitehall doesn’t usually know best.

The Northern Rock crisis is about more than Northern Rock. For days commentators have been scouring the historical record for parallels. Most of us do not stretch back as far as the last big bank run, Overend & Gurney in the 1860s. The secondary banking crisis of the early 1970s is more familiar territory.

Then, as now, the global economy had been through a period of exceptionally strong growth. Commodity prices were soaring. Nationalisation was already in vogue. When, in 1973, secondary banks got into trouble after overlending on commercial property, the Bank of England organised a lifeboat to bail them out and took some under its wing. The crisis marked the start of the damaging economic instability and the “stagflation” of the 1970s.

Another candidate, at least in terms of reputational damage to the government and Britain, was Black Wednesday, September 16, 1992. Norman Lamont, chancellor at the time, insists its role has been exaggerated in the telling.

He would say that, but he has a point. Labour went into a big poll lead immediately after but a year later it had halved. Really big Labour leads did not come until Tony Blair became leader and the Tories tore themselves apart over Europe and sleaze. And Black Wednesday had a happy economic ending: Britain did infinitely better outside the ERM (exchange-rate mechanism) straitjacket.

So what will we think about Northern Rock in a couple of years? Will it be regarded as a housekeeping exercise well on its way to resolution as the debt is paid off? Will it be seen, like the secondary-banking crisis, as marking the beginning of a period of the “great instability”, replacing the great stability of recent years? Could it be that Labour will soon be tearing itself apart, as worried MPs start to speculate openly, not just about Darling but about Brown?

As far as reputation is concerned, the damage was done before last weekend. Brown, having enjoyed high approval ratings throughout his chancellorship, slipped at the final hurdle. Conservative claims that his final budget in March last year was a con trick (the income-tax cuts that weren’t) hit home.

By summer, the new prime minister’s honeymoon gave Labour a small lead in the monthly question on economic competence - who do you trust to raise your family’s standard of living? - run by YouGov for this newspaper. That fell away in the autumn, due to Northern Rock and the wider credit crisis. But a Populus poll for The Times , since the nationalisation announcement, shows Labour back in the lead.

The main conclusion from the polls suggests, however, that voters have a “plague on all your houses” attitude on competence, favouring neither the Tories nor Labour. The government is suffering but the opposition is not yet presenting a convincing alternative. This is why Brown’s advisers think that, if Northern Rock is seen ultimately to have been well handled, it will do the government a lot of good.

What matters most is the kind of economy we will have over the next couple of years. Kate Barker, the longest-serving external member of the Bank of England’s monetary policy committee (MPC), gave a gloomy assessment last week.

Perhaps it was because she was back in her native Stoke but she struck a downbeat tone, warning that “a prolongation of the present difficulties in accessing wholesale funds could restrict the quantity of mortgage lending during 2008 . . . feeding back into a decline in the housing market, somewhat lower consumer spending, and also into lenders’ balance sheets, reducing lending capacity further”.

These are the negative feedback effects the Bank is worried about and which would also have implications for Northern Rock. She went on to warn that a severe credit tightening could hit growth hard, in a way that “could prove difficult to turn round quickly”.

The MPC is singing from the same hymn sheet. Andrew Sentance, in a speech on Thursday in Exeter, addressed head-on the question of whether there would be a recession. His conclusion was there would not be, at least in terms of an outright, year-to-year drop in GDP. But he warned the slowdown in growth might be “more significant and sustained” than any in the inflation-targeting era, which stretches back more than 15 years.

Sobering stuff. We are, however, mainly still waiting for the slowdown shoe to drop. Somebody needs to tell Britain’s shoppers that tougher times lie ahead. Retail sales volume jumped 0.8% last month and was 5.6% up on a year earlier. Sales of household goods rose nearly 10% in the latest three months, their best for six years.

In industry, the CBI said manufacturers were enjoying their longest run of sustained demand for 12 years, measured by the orders balances in its monthly surveys. The good news on tax revenues, something I touched on last week, did not speak of an economy weakening sharply. Revenues are a backward-looking indicator but their 12% annual rise in January was impressive.

There are plenty of storm clouds gathering, which will determine how much trouble the economy is in. So far, however, the worst is holding off. And the government will still hope to avoid being hammered by the Rock.

PS: Immigration is fascinating, and a new report from the Organisation for Economic Cooperation and Development, A Profile of Immigrant Populations in the 21st Century, has some juicy nuggets. We forget that Britons are often other countries’ immigrants. Three million of us live in other OECD nations.

Britain is a net exporter of the highly skilled to advanced economies; 14.9% of ours work in other OECD countries while only 6.5% of the highly skilled here are from there. We import skilled people from less advanced countries – they are nearly 10% of the highly skilled in Britain. To compensate for our brain drain, we drain developing nations. Not good.

From The Sunday Times, February 24 2008

These are dark days in the Treasury. Last October's hasty and openly political pre-budget report is unravelling faster than one of your granny's scarves, Northern Rock sits like a great fat cuckoo in the nest, and officials are praying that figures this week will bring some relief from the string of awful releases on the state of the public finances.

For years, the Treasury was famous for attracting fine minds in bad suits, happy to work in its austere, maze-like, red-lino floored building. Now it has modern, airy, high-tech headquarters that would not be out of place in a dotcom firm. The dress code is casual. But the Treasury's reputation has rarely been lower. Even the political columnist of the Financial Times, usually a friend of the department, is calling for its break-up.

Are the Treasury's problems simply down to the fact that Alistair Darling, so far at least, turned out to be a surprisingly accident-prone, unintentionally headline-grabbing chancellor?

I shall return to him in a moment. The Treasury's difficulties, however, were in all important respects created during the 10 years that Gordon Brown was chancellor.

From the moment Brown and his aides walked into the Treasury in May 1997 and started handing out orders, it was clear that the relationship between ministers and officials would be different from ever before. Margaret Thatcher liked to distinguish between people who were "one of us" and those who were not, but her chancellors worked well with the Treasury they inherited.

Under Brown the wave of departures among officials started from the very top and continued. As the old Treasury left, so the politicisation of the new Treasury gathered pace. When Ed Balls, Brown's Labour party aide, now a minister, was appointed chief economic adviser, normally a post for a civil servant, that process was set in stone.

There are two reasons why all this is relevant now. The first is that, so much was the post-1997 Treasury geared around Brown that when he eventually moved on (taking a string of officials with him) it was left like a ship without a rudder; Hamlet without the prince.

The second was that officials lost the "Yes, Minister" ability to say "No". Opposition to policies would be construed as opposing the Brown-Balls project and thus disloyalty. This reached its nadir with last October's pre-budget report, essentially a party-political broadcast dressed up as a Treasury statement, and with damaging consequences. Somebody should have said no.

So is there anything Darling can do to claw back his own, and the Treasury's, reputation? It's a tough job but somebody has to do it, so let me try.

His first task is to try to undo some of the damage caused by his efforts so far. Let us be clear, there is a case for making "non-doms" pay some tax, even £30,000 a year, just as there was a case for simplifying an overcomplicated capital-gains-tax (CGT) regime. There was no case, however, for rushing through changes to either, particularly taxation of non-doms, over which Brown fretted for years. If it was easy, then even Brown, who takes his time to come to decisions, would have acted.

My sense is that on both CGT and non-doms, Darling has made as many concessions as he intends, and both will be pushed through in the March 12 budget. But there is a powerful case for further consultation, if necessary putting the changes on ice for 12 months, as groups like the Institute of Directors have said.

Second, the chancellor should review, and if necessary rewrite, the fiscal rules. This is not a time for tax hikes — it rarely is — and the inclusion of Northern Rock debt on the government's books has already temporarily bust one of the fiscal rules — that debt should stay below 40% of gross domestic product.

But the golden rule, which means in effect that the government should only borrow to invest, has proved itself to be unsuitable, allowing too much borrowing during the good times and leaving the public finances vulnerable during a downturn.

It has meant that while most other countries have been reducing their budget deficits, Britain's has been rising. The rule means that the norm for public borrowing is more than 2% of GDP, currently in excess of £30 billion and rising to £40 billion. That is too high.

As I say, this is not the time for immediate radical fiscal action, but Darling would do himself and the Treasury a lot of good if he announced that, over time, the intention is to move to a tougher fiscal rule, with a borrowing norm of no more than 1% of GDP and even smaller increases in government spending than the 2% annual real rises that are being planned at present. Third, the Treasury has to get Northern Rock off its hands. We will know more this week but it would be a terrible mistake if nationalisation was left as the only option because of government insistence on driving a hard bargain. That drove Olivant away and it could yet see off Virgin's bid. Whatever Vince Cable says, it is far better that somebody makes money out of rescuing it than that the dead hand of nationalisation makes an unwelcome comeback.

Finally, if Darling wants to make himself really popular with business he should do something about a problem that is as big a burden as rising taxes and, for a government strapped for cash as this one, cheaper to tackle.

The British Chambers of Commerce will say this week that the cumulative burden of red tape on business under this government has reached £66 billion, and is rising by £10 billion a year. Brown promised to tackle this and the Department of Trade and Industry was deliberately renamed the Department for Business, Enterprise and Regulatory Reform.

But the BCC's exercise shows that the tide of red tape continues and that examples of reductions are as rare as hen's teeth. George Osborne, the shadow chancellor, proposes an Office for Tax Simplification. If Darling were to apply his lawyerly brain to doing something meaningful in this area, he could do a lot of good. He could, indeed, yet turn out to be a good chancellor.

PS: For a man who expects to write a second letter in the coming months explaining why inflation has risen above 3%, at a time when the economy is slowing sharply, Mervyn King was surprisingly upbeat last week in presenting the Bank of England's quarterly inflation report.

One skip doesn't make a summer but it's a start.

From The Sunday Times, February 17 2008

We know, thanks to the Bank of England’s decision on Thursday, where interest rates are in the short term. But where are they heading in the next few months? And will we look back on this period as a time of unusually low or high rates, or something close to the norm?

It is a big question. The days when the nine members of the monetary policy committee could happily slash interest rates in response to international events such as the 9/11 attacks on America or the Iraq war appear to be over.

Last week’s decision to cut Bank rate from 5.5% to 5.25%, and the statement that accompanied it, epitomised the “difficult balancing act” Mervyn King has warned about. On one side there is the risk that a short-term rise in inflation will become ingrained in inflationary expectations and pay. On the other was the risk that a “sharp slowing in activity pulls inflation below the target in the medium term”.

The governor still looks forward to the “calmer waters” of low inflation and a better-balanced economy. No doubt he is at this moment thinking of a colourful analogy to present alongside this week’s inflation report.

Some talk about the Bank’s problems being tantamount to stagflation; stagnation combined with high inflation. As somebody who does remember the 1970s, and paraphrasing a famous American political riposte: I knew stagflation; this is no stagflation.

So where is Bank rate likely to settle? When it rose to 5.75% last summer, there was plenty of talk of it climbing to 6%, 7% or even 8%. Some of the same people who were predicting those rises are now forecasting falls to 4%.

There is, however, something like an invisible elastic that pulls the rate back towards its norm whenever it threatens to move too far away from it.

When the Bank was granted independence, nearly 11 years ago, its initial task was to establish its antiinflation credibility. Bank rate, 6% on the day of the independence announcement, was raised to 7.5% a year later.

If we exclude the first 18 months, when the Bank was gaining its spurs, the rate has been no higher than 6% and no lower than 3.5% since. I would argue 3.5% was a bit of an outlier, which is unlikely to be repeated any time soon, so the “normal” range we should be thinking of is probably 4% to 6%. Interestingly enough, the average Bank rate since early 1999 has been 4.8%.

This is worth noting because it is in my view close to the “neutral” interest rate for Britain, which I think is in a 4.5% to 5.5% range. By neutral I mean a rate that is neither restraining nor stimulating the economy. You would expect the rate at neutral when the economy is growing in line with trend, 2.5% to 2.75% a year, and inflation is hitting its 2% target.

Members of the Bank’s monetary policy committee occasionally talk about the neutral rate but it is, if not a banned expression within the hallowed halls of Threadneedle Street, officially frowned upon. I would not expect to find it, for example, in this week’s inflation report.

Sir John Gieve, one of the two deputy governors, came close last month when he talked about the growth slowdown possibly justifying “a progressive shift in policy – from restrictive to a more neutral stance”.

Part of the Bank’s reluctance to commit itself is that a neutral rate implies that monetary policy is more rigid and mechanistic than it is. The neutral rate may not be the same in all circumstances.

Even if you regard it as a useful concept, which I do, there will be periods when the rate has to be above neutral, as it has been in recent months. It is also possible, depending on the impact of the credit crisis and the extent of this year’s slowdown, that we will have to go below neutral. My prediction is of a 4.75% Bank rate by the end of the year. Others are looking for more aggressive cuts.

Recent data have been less than reassuring for those, including King, looking for a rebalancing of the economy but not so bad in terms of growth. The purchasing managers’ survey for the service sector last week was stronger than expected, while its counterpart for manufacturing was weak. The economy is slowing rather than diving, allowing the Bank to pursue a gradualist approach to cutting rates, in contrast to the Federal Reserve. You will know the wheels have come off if the Bank goes into slashing mode.

What about the longer term? Though bond markets have to form a view of interest-rate levels in the long run, it is a brave economic forecaster who does so. Could it be that we have seen the best of low inflation and that rising food and energy prices, coupled with the end of the maximum impact of the China effect on goods prices, mean inflation will be much more troublesome in the next 15 years than in the past decade and a half?

The National Institute of Economic and Social Research, in its latest review, had a stab at projecting rates into the murky future. Assuming growth averages 2.5%-2.6%, inflation is close to target on the CPI and between 2% and 2.5% on a broader measure, the gross domestic product deflator, it comes up with an interest-rate average of 5% for 2009-11 and 5.1% for 2012-16.

That is in the middle of my neutral range and just above the recent average but by no means daunting. After all, it is not so long ago that the norm for UK rates was in double figures. So if anybody asks you for a number on where interest rates will be in 10 years’ time, just say 5%.

PS: Television viewers may be confused. For years, a staple of the schedules has been programmes about how to move up the property ladder. Only antiques programmes have been more popular.

Finally, my mention of Britain’s transport shortcomings and their effect on economic growth created something like gridlock in my e-mail inbox, confirming that this is a national issue. I’ll address it soon. Given that Brown commissioned Sir Rod Eddington to investigate it, it will be interesting to see whether anything has been done on the back of his recommendations made more than a year ago.

From The Sunday Times, February 10 2008

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Imagine, for a moment, you are a member of the Bank of England’s monetary policy committee (MPC). If you are Mervyn King, the governor, you have been reappointed for a second five-year term, with plenty of time to make good the recent damage to the Bank’s reputation. If you are Andrew “uber-hawk” Sentance, another MPC member, you have also been reappointed. So what do you do?

You start, as the Bank always does, by looking at the global economy. There has been a lot of nonsense talked about world recession, given that we are coming out of a period in which the global economy has enjoyed four years of near-5% annual growth, the best for three-and-a-half decades.

True, America slowed to a crawl in the final quarter of last year, its economy expanding at an annual rate of only 0.6%. Hence the nearest thing you will see in central banking to a red alert: the Federal Reserve cutting US interest rates twice, by a combined 1.25 percentage points, in eight days.

But China, India and other emerging economies are growing rapidly and likely to continue to do so. The most significant thing in China last year was that consumer spending, rather than exports and investment, made the biggest contribution to growth, with retail sales up 17%. The American slowdown will nudge China’s growth down but still leave it at about 10%.

America’s gross domestic product, $13,843 billion, was four times the size of China’s, $3,430 billion, last year. But even on this basis, China’s economic growth of 11.4% made a bigger contribution to the world than America’s 2.2%.

When the numbers are adjusted for relative prices, so-called purchasing power parity, as they should be, China is 45% of the size of the American economy, and 10% of the world. So last year just under a quarter of global growth came from China. This, the year of the Beijing Olympics, will again see the biggest contribution of any country coming from China, notwithstanding the severe winter snows.

Add in India, Opec, Russia and Brazil, and well over half of global growth this year will come from outside the G7. If you are sitting on the MPC, then, you will be reasonably reassured that growth is not collapsing. The International Monetary Fund’s new forecast, of 4.1% global growth this year, is down on last year’s 4.9% but still strong. Between 1998 and 2003, for example, global growth averaged only 3.3% a year.

You would not, however, be too reassured. Just as it is possible to have the wrong kind of snow, it is possible to have the wrong kind of global growth. Britain’s economy is not as tied in to growth in China, India and other booming economies as it should be. The slowdown in America and Europe, with the IMF predicting 2008 growth of 1.5% and 1.6% respectively, will have a significant negative impact, only partly offset by what is happening elsewhere.

What about closer to home? Growth in the final quarter of 2007, 0.6% (actual, not annualised), was close to trend. It is slowing, not collapsing, but will soon be growing below trend.

Mortgage approvals in December, 73,000, were below the lowest point in the 2004-5 housing pause and point to further housing weakness, though the Nationwide reported a fall of only 0.1% in prices in January and thinks it has detected tentative signs that demand may be bottoming out.

Consumers, however, are cautious and so is business. The CBI said January retail trading was the weakest for 15 months. Consumer confidence did not improve as much as it normally does between December and January, and remains weak.

There is a lesson for Britain on the other side of the Atlantic and it is that economic weakness can spread and become cumulative in its impact. The MPC would never want to get into the position in which the Fed has found itself, having to deliver panic rate cuts merely to steady the ship. This reinforces the argument for pre-emptive action.

In circumstances like these, the Bank could normally look down the road to the Treasury for a bit of help. Gordon Brown used to bore on about monetary and fiscal policy operating hand in hand, in a complementary way. No longer.

I have been accused of being too kind to Brown’s chancellorship, though not by Downing Street. On the public finances, however, I have long been cr