It is the end of an era for Gordon Brown this week in Brighton, for it must be very much odds-on that this will be his last Labour Party Conference as Chancellor. It would be astounding were he to stay on in that position after the next election.
But it is also the end of an era in two other respects. The long consumer boom that has continued throughout his period of office is pretty certainly drawing to a close. And the rapid rise in public spending will end next year. Both have been financed by a huge surge in borrowing. Remember this when the Chancellor makes his speech this week.
The end of the consumer boom is inevitable both because people will need to rebuild their savings at some stage and because borrowing is going to cost more.
The first graph shows the relationship between retail sales and mortgage approvals. At the moment, retail sales are still strong, surprisingly so in August, but one of the two principal forces underpinning spending, the housing market, seems to have come to a halt.
Leave aside the whole business of house prices, which are a lagging indicator of the state of the market, and look at what has been happening to mortgage approvals. As you can see from the left-hand graph, they have gone soft. The "fit" between the retail sales line and the approval one is not perfect, but every time during the past 11 years when there has been a fall in mortgage approvals, there has been a subsequent fall in the rate of growth in retail spending.
Key point here: there does not need to be a housing crash for the growth in retail sales to slow. And if that happens, we will feel ratty. People like spending money.
The other influence on how much we spend is how much we earn. Average real earnings are still positive, though up only about 1 per cent year-on-year. Hours worked is also falling. GFC Economics, which pulled together these figures, notes that employment has been flat in the three months to July, in contrast to the trend for the previous couple of years.
There is no reason to think that real incomes are going to collapse, unemployment surge or anything like that. It is just that they are unlikely to be particularly strong in the coming months, so will not provide great support for spending.
The long boom - the longest, as the Chancellor periodically reminds us, in British history - has helped support the big spending spree. But to maintain growth in spending, which at one stage reached 10 per cent a year, the Treasury has had to move from surplus to deficit, and a deficit that each year exceeds the number first thought of. That is not because of spending overshooting the target but because of revenues undershooting.
This year is no exception. We are five months into the financial year, and while revenue is up, it is running 1 per cent below budget. It is too early to say whether the Chancellor will break his "golden rule" about matching revenues to current spending over the economic cycle, but it does look as though the fiscal deficit may deteriorate this year, rather than improving.
Now, I don't think it is sensible to get too hung up about fiscal rules, be they self-imposed or of the Maastricht variety. What matters is the broad thrust of the numbers. And the broad thrust here is a disturbing deterioration in tax income.
This year, growth looks like being more than 3 per cent. That ought to mean a good year for taxes, not a poor one. What seems to be happening is that while VAT revenues are fine - a reflection of strong retail sales - income tax revenues are not. Why? It is not clear but it is not hard to foresee pressure for higher taxation, or spending cuts, or more probably both, after the next election.
That leads into a wider debate as to the appropriate level of taxation and the size of the state. Gordon Brown's legacy has been a bigger state sector, not radically bigger but somewhat bigger, financed by somewhat higher taxation. By continental European standards, the UK state is still relatively small, though not by US, Japanese or Canadian standards. So in the G7 we are in the middle of the pack.
But something is afoot in Europe. Leave aside the new EU member states, which are putting a lot of pressure on their neighbours to cut taxes, and look instead at what is happening at our end of Europe.
Just last week, Sweden announced that it planned to end inheritance tax. Sweden, that great egalitarian beacon? Yep, it is going even further than the Tories, who merely want to end the tax on estates of less than £1m.
The next day, it was the turn of the Dutch. The Netherlands plans to cut company taxation, as well as reducing disability entitlements and early-retirement tax breaks. To add insult to injury, it is pressing private sector workers to accept the pay freeze already imposed on public sector ones.
That was just last week. Expect much more in the months to come. As the Dutch acknowledged, they were cutting taxation because they were losing investment. As continental Europe cuts its taxes, the UK's modest tax advantage is gradually eroded. Indeed, the challenge for the next chancellor may become one of maintaining revenues rather than increasing them.
So the Brown era may come to be looked upon as a golden age for public finance - a period when there was money to try to fix things, when chancellors could play Father Christmas while making a reasonable act as Miss Prudence at the same time.
He will deserve the warm reception he receives because he has delivered the great prize that has escaped all his predecessors since the Second World War: macro-economic stability. It is a reasonable hope that this part of his legacy will endure. But the uniquely favourable conditions under which he was able to increase public spending massively and allow an extraordinary rise in living standards are coming to an end.
Next year would be a good time to get out and do something different - whatever that might be.
Wanted: a pact to prevent protectionism
It is G7 time. Next weekend marks the autumn meeting of finance ministers and central bankers from the world's seven largest economies - or it would do if it weren't for the fact that this time eight countries will be represented, for China is joining the group.
In previous years, Russia has joined in, but that was more to assuage its insecurities than a reflection of its economic might. By contrast, China now clearly qualifies for this year, maybe next, as it passes the UK as the world's fourth-largest economy.
There is a particular reason for wanting China inside the tent: it is possible that the G7 may need to move swiftly in the coming months to stabilise the world economy.
The origin of this group was the meeting of the finance ministers of the five largest economies, the G5, at the Plaza Hotel in New York in 1985. The dollar was soaring against the yen, the trade deficit with Japan was ballooning and protectionist pressure was rising in the US. The Plaza Pact, as it came to be called, stated that the dollar was too high. The central banks then intervened on the markets to cap it.
As a result - and I think this was partly because the dollar was turning anyway - the rise stopped, the trade deficit with Japan started to narrow and the threat of protectionism was averted. Two years later, at a meeting in the Louvre museum in Paris, the same team declared that the dollar had fallen far enough and the foreign exchange markets started a long period of relative calm.
Now the US trade deficit is even larger than it was in the mid-1980s and there are similar protectionist pressures. But although a big deficit with Japan remains, that has been supplemented by the one with China.
While the dollar has fallen somewhat against the euro, both Japan and China have resisted allowing it to fall against their currencies. The trade gap remains. Clearly, a new Plaza Pact is needed, but this time with both Japan and China.
Do not expect this to happen next weekend. While it is conceivable the G7 will say something, it feels too early. Things have to get worse for no one is sufficiently frightened. But with China in the tent, Plaza II could be cobbled together swiftly at some stage in the months ahead.Reuse content