Whoever wins the election, the maths remains the same

The next chancellor's decisions will be constrained by the cyclical nature of the world's economy

One thing was settled last week: there will be no increase in income tax (over and about Labour’s desire to reinstate the 50 per cent top rate), nor in national insurance, nor in VAT during the next parliament.

Well, maybe not quite settled, politics being politics. But both major parties have now committed themselves to these tax pledges – either by accident or design. Since these three raise nearly three-quarters of all tax revenue, that rather boxes in the next government. You can fiddle around with increases in duties on fuel or booze, you can try to squeeze more from the company sector, and occasionally think up new taxes, such as levies on banks. But if you really want to raise significantly more revenue, you have to go for the big three.

It is a harsh discipline that will become harsher for two reasons: one is that it is more difficult now for governments to slide spending decisions off their own books and push the cost on to future generations by such devices as the Private Finance Initiative. The other is the rising burden of underfunded public service pensions. Now we have the Office for Budget Responsibility, the costs of such decisions are made explicit.

So the next government will have roughly the same tax revenues relative to GDP as the present one, or indeed all British governments since the mid 1980s: around 36 per cent of GDP.

This is one of the remarkable constants; for a generation no government has managed to increase tax revenues faster than the growth of the economy. Gordon Brown tried, and based his spending decisions on the assumption that revenues would rise. They never rose quite enough even in the boom years, and when the boom ended, they collapsed.

The next government will have pretty much the same amount of money to play with. My own instinct is that a Labour-led government would have to follow a slightly tighter fiscal programme than a Conservative-led one, because it would encounter more push-back on the revenue side and have to pay slightly higher interest on the national debt. But these differences would be marginal. The rhetoric may be very different but the maths remains the same.

If you accept this argument, it follows that the success of the next government will be determined by things other than fiscal policy. These include the general global economic outlook, the performance of our main export markets, the trend of inflation and of interest rates, and so on.

The trouble is that it is impossible to do more than give the barest sketch of the likely trends of the world economy over the next five years. All our experience tells us to expect the unexpected. Projections that show steady growth through to 2020 are just that, projections – not forecasts. So what can we say?

I find it easiest to think of the world economy as two stories, one cyclical, the other structural.

The cyclical story was the one that undid the last Labour government, as Gordon Brown assumed that growth would continue forever. He had, he said, abolished “Tory boom and bust”. The cyclical story has rescued the coalition: eventually growth did come back.

It would be lovely to be able to project forward the likely path of the economic cycle, perhaps concluding that there will be another three or four years of decent growth, to be ended by another global recession around 2019. That seems to me to be a reasonable working assumption, but it is based on the flimsiest of evidence.

The cyclical story does, however, carry one common-sense message for the incoming government: you must use the good years to strengthen public finances so that they can withstand the bad ones.

The structural story has two elements. One is the continued long-term shift of economic weight away from the developed world and towards the emerging world, for though the concept of the Brics as an entity has been discredited, two of them – China and India – have continued to race ahead. We need to continue to work at those relationships.

The other element is the innovation and energy of parts of the developed world, notably the US but also to a lesser extent the UK and Europe. The hi-tech sector will, over the next five years, develop a string of new ways of applying technologies that are still embryonic to practical use. This will create opportunities for government, which can use technology to cut costs and improve service. The message here is that the next government can be cleverer than its predecessors.

And if all this is a long way from the current political debate, well, I suggest there is something wrong with the debate.