Don't get too cheerful, Mr Brown

`The party may have a few more months to run but it is drawing to a close, and the people calling time are the world's central banks'
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IT IS Budget time again - or rather pre-Budget time, as next Tuesday Gordon Brown will give the pre-Budget report that will set the scene for next spring's Budget. He will be purring with delight. Expect a glowing account of the nation's finances, with a sizeable Budget surplus and even faster growth than he forecast last March. Blessed is a Chancellor with money to spend, or to "give back".

But there is a dark lining to the silver cloud. If our economy is picking up its growth rate, so too are other major economies around the world. The United States canters on, and is now about to enter its ninth year of growth; much of continental Europe is now growing strongly; Japan may at last be out of recession; and much of the rest of East Asia seems to be on the mend too. That might also appear good news, were it not for one thing - if almost the entire world economy picks up speed at the same time, expect signs of strain, and the most evident of these will be rising inflation.

If that happens, expect interest rates the world over to start climbing to try to head it off. We may well get a taste of this medicine here in Britain today from the Bank of England, if its Monetary Policy Committee (MPC) decides to click up rates further.

That decision will take on a bit of edge, thanks to the row between the Bank hierarchy and the "independent" members of the committee - who work in the Bank but feel that they are being denied the resources to develop their views fully. But in reality what they do, or indeed what the Bank of England does at this particular meeting, is pretty much of a slide- show in the great global perspective. If inflation starts to rise, the world will get higher interest rates.

It is not just the UK that is facing higher rates, for what we do is just one small part of a global mosaic of different decisions, and different pressures in different parts of the world. The key decisions will come from America's Federal Reserve and the European Central Bank, and both are expected to push rates up before the autumn is out. The party may have a few more months to run, but it is drawing to a close, and the people calling time are the world's central banks.

Why should they spoil the fun? Because if they don't push up rates to curb inflation, something much nastier will happen in the future. The more the boom is allowed to get out of hand, the greater the scope for a bust.

So at some stage in the coming months we are going to feel less cheerful. I cannot give a time - I wish I could - but it is pretty clear that when the central banks do act to lean against the boom there will be disagreeable consequences. In America the obvious candidate is a reversal on Wall Street, which is trading at historically very high values. Here, I suppose there will be some parallel downturn in share prices, but inflationary pressure has been more evident in house prices than it has been in share values.

There are three main varieties of inflation: in the prices of goods, services and assets. Goods inflation has disappeared. The prices of them are as likely to be coming down as to be going up. Computers obviously, but also cars and other consumer durables are all coming down in price. These falls offset the few other items whose prices are still going up.

Services are still rising in price, though not very fast. The main reason for this is that here in parts of Britain there is strong demand for services that are in limited supply. Services vary enormously - the word covers everything from a haircut to a season ticket - and they are hard to measure because their quality varies so much. But as a (crude) rule the price of these over the last few years has risen at double the rate for goods.

Still, even that is not the gravest problem, certainly in the UK. The really disturbing problem here is the third sort of inflation: asset prices. House prices are now rising faster than at any stage since Lawson's 1988 boom. The spread is uneven; the extreme surge is in London and the South-east, while prices in parts of the North are hardly rising. Still, the overall trend is strongly upwards. This may be great for home-owners in the Home Counties, but in social terms it is a disaster. In economic terms it could trigger a catastrophe.

The social disaster is that soaring house prices, or, for that matter, soaring asset prices in general, greatly increase divisions in society. The richer you are, the richer you get. The divisions grow, both geographically with the South widening the gap against the North, and with home-owners widening the gap against social housing tenants. The social implications of these widening gulfs receive much less attention than the admittedly wide gulf in earnings, but these gulfs are arguably even more socially corrosive. That is happening already.

The economic impact of rising house prices has yet to show through clearly. When people find their houses are rising in value, they feel richer and so tend to spend more. That boosts the economy, but it does so in an unsustainable way. In the late Eighties this took an extreme form. Savings dwindled and imports surged, and people used the cash to buy foreign goods. There has been a less extreme version of the 1988 experience this year. Up to now things are still under control, thanks in part to the slow-down in growth in the early part of this year. But if house prices are allowed to carry on rising, just the same dangers will arise. This gives the dark tinge to the silver clouds, and it will be down to the Bank of England to make sure that the dark patches do not grow and envelop the whole sky.

Whatever the BoE does today, expect the Chancellor to make light of it. Rising interest rates? Well, that is just a sign of the strength of the economy, and anyway that is not the Treasury's department these days. Instead we will get a lecture on the Government's prudence; how sound finances will be maintained in the run-up to the election, and how, thanks to these, it will be possible both to spend more money on government priorities and to cut taxes. We shall not get any details of tax cuts, for those will come in the Budget next March. But we shall get a few little chunks of additional spending, and an optimistic assessment for growth next year. Expect Mr Brown to say, too, that the still-expanding economy at last makes full employment an attainable goal.

All too good to be true? The Chancellor will deserve credit for having kept the UK growing reasonably steadily through the last two years of what has now been a seven-year boom. Give him a cheer. Part of that is due to the decision to give the Bank of England the power to set interest rates. That is worth another cheer.

But remember that much of the success of our economy is the result of being English-speaking, and, like other English-speaking nations, having made big structural reforms well ahead of the Continent and Japan. That does not warrant a cheer, because it has nothing to do with him.

The real test is to come. Those dark patches will loom larger over the next 18 months. Rising interest rates through the autumn will give a hint of these worries, though the problems are as much abroad as at home.

Chancellors really show their class when an economy hits rougher times. The man is doing fine, but he has not yet been tested.