Brown should not discount the Tories just yet

`For Labour to fulfil its dream of winning two complete terms, its leaders need to remain cast as warriors against complacency. If they are as canny as they look, they will be perfectly aware that the 2002 election campaign has already started'
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Gordon Brown will by now have absorbed the Treasury's welcoming brief, so he will know whether the famous (though largely apocryphal) government "books" support the case for the early tax increase that is being demanded by much of the economics profession in this country. Funnily enough, nobody seems to believe that this tax increase is needed to correct a rapidly deteriorating budget deficit position. In fact, the Treasury forecast for this year's public sector borrowing requirement will probably be around 0.5 per cent of GDP, lower than expected at the time of Kenneth Clarke's final Budget, and there will be further improvements in the projected path for government borrowing in each year of the new parliament.

Despite this, it is alleged that tax increases will inevitably be needed at some point to correct the "unsustainability" of the government accounts. Last week, this column examined these arguments in detail, and concluded that the case was somewhat hazy, depending on very uncertain estimates of how much spare capacity exists in the economy. This will determine how rapidly GDP and government revenue can be expected to grow in the next five years. Take an optimistic view of this issue, and there will be no problem with the sustainability of the government finances; take a pessimistic view, and there will be. Anyone who claims to know the answer to this question today with any certainty is a charlatan.

Quite separately, it is also argued that tax increases are needed immediately to reduce the growth of consumer spending, thus taking the upward pressure off base rates and sterling. There is indeed a strong case for slowing a consumer sector which is already growing at a dangerous 4-5 per cent annual rate in real terms, even before the impact of the pounds 20bn building society windfall has been felt.

Perhaps even more worrying, the National Institute pointed out last week that equity withdrawal from the housing market - the process by which consumers borrow against the security of their homes to increase their general spending - has been rising sharply in recent quarters. But the possible impact of these special factors is so large that a consumer tax increase of at least pounds 7bn would be needed to correct the situation, and that is surely not feasible.

Some, or all, of the work will inevitably need to be done by higher interest rates. Of course, every little bit helps, and the tax lobby reckons that there will never be a better time politically to increase the tax burden, on the theory that the electorate will have forgotten about this little indiscretion in five years' time.

"Take the pain early, and dispense the rewards later," is the most traditional mantra of British politics. It is certainly alive and well in the recommendations of most of today's commentators. Some have added a new thought since polling day - that the Tories are anyway dead and buried for at least a decade, so there is an extra reason for "doing the right thing" on the tax burden.

This is dangerous thinking for New Labour. For one thing, the experience of the past five years scarcely offers support for the "early pain, late rewards" view of the electoral cycle. As David Blake, political analyst at Goldman Sachs, has pointed out, the most compelling fact about the last parliament was that the normal "quadratic" pattern of government support - a pattern that has been observed in almost every parliamentary term since the war - was entirely absent.

The quadratic is a simple algebraic function which is shaped like a large U. This function happens to fit the normal pattern of government support in the course of a parliament very closely. Until the 1992-97 experience, the norm was for government support to decline automatically for about 36 months and then, just as automatically, to turn up again as the next election approached. This regular bout of the mid-term blues did not seem to be related to any particular economic phenomenon, but the fitting of a quadratic trend never the less enabled some econometricians to claim that they had found a coherent "explanation" for the electoral cycle.

Actually, they had never really done anything more sophisticated than simply describe the fact that the mid-term blues usually happen in mid- term. Nevertheless, the break-down in the quadratic in the last couple of years was extremely startling.

Until 1995, the popularity of the Major government followed the normal downward profile. But then, in 1996 and 1997, government popularity stubbornly refused to recover at the normal rate of about 0.7 percentage points per month. Indeed, it barely recovered at all.

The 31 per cent level of support achieved last Thursday was about 6 per cent lower than the Tories have ever experienced before, which is a measure of the shock meted out to what had previously been the most effective electoral machine in Western Europe.

The clear implication is that the electorate "switched off" the Conservative government several years ago, and from then on were not subject to the normal influences that might have made them switch back. This might prove to be very good news indeed for New Labour, since the "on" switch could prove extraordinarily difficult for the Tories to find, just as it proved murderously difficult for Labour after 1983.

Following Michael Heseltine's health tremor last week, none of the other putative candidates for the leadership can quickly persuade the warring Euro-factions to bury their hatchets, so the launch of the New Tory Party could be at least one more election away. All this might suggest that the incoming government can get away with almost anything in its first few years, secure in the knowledge that the Tories will be unelectable for quite a while. Tax rises, here we come! But there is an alternative view.

Maybe an immediate frontal assault on the consumer - as opposed to some fiscal tightening through the company sector and restraints on public spending - would break the electorate's bond of trust with the new government just as assuredly as the Lamont/Clarke tax-raising Budgets did in 1993. Once broken, there may be no quadratic for Mr Blair to ride in the second half of his term, any more than there was one for Mr Major.

In addition, this cautionary argument continues, it is most unwise to see the Tories as a spent force. Perhaps the 1997 result simply tells us that the electorate is getting more volatile, so the eventual swing back to the Tories will be devastating.

Furthermore, for the past two elections, the swings against the Conservatives in the marginals have been bigger than in the rest of the country, so their loss of seats has been hugely magnified relative to their loss of votes. When the swing back occurs, it will be Labour seats that will fall like ninepins.

A safe rule in British politics these past two centuries has been never to count out the Conservatives. For Labour to fulfil its dream of winning two complete terms, Messrs Blair, Brown and Mandelson need to remain cast as warriors against complacency. If they are as canny as they look, they will be perfectly aware that the 2002 election campaign has already started.