Just after the 1997 election, I met with a Conservative MP who was confident that Labour would be out of power pretty quickly. His view was that they would mess up the economy as usual and then the Conservatives would be back in for another extended period. He was wrong of course, because the economy did not implode and the rest, as they say, is history. Moving on to last year I went to a dinner hosted by a major international bank, the highlight of which was a talk by their Chief UK Economist. His theme was the British economy under Labour, and in particular why it had become less cyclic during their period of government. It was quite a detailed analysis, touching on global factors, China and so on, but his bottom line was very interesting: it was that the economy had outperformed its historical trend with regard to growth largely due to the British consumer. It seemed that ordinary people had spent at heroic levels year on year and that had provided the extra percentage points of growth that had kept things looking rosy for Blair and Brown. On Brown himself, the banker gave him two cheers. While had pushed up both taxation and government spending to record levels, he hadn’t done anything particularly dumb, which is not bad by the standards of previous Labour Chancellors.
Hang on though, were has all of the money come from for this extended spending spree? Well there was an answer to that as well; debt. The consumer sector in the British economy is running at truly staggering levels of debt, fuelled by quick loans, credit cards, and equity taken out of houses whose value goes nowhere but up. Now it appears that the era of cheap money is at an end. There is talk in the City of a corporate credit crunch, where the supply of affordable finance for companies dries up, with inevitable knock-on effects on ordinary people’s wallets. Interest rates are climbing steadily, and have now reached the point where buying-to-let or buying-to-speculate has become uneconomic, never mind the effect on people’s mortgage payments. House prices are wobbling, and the new Chancellor must be worrying what happens if the ordinary consumer goes on strike, or just cannot afford that nice new kitchen any more. If growth slows and house prices slip then the political situation could change pretty quickly. That Tory MP in 1997 was right. It’s just that his timing was off.