Michael Harrison's Outlook: In the real economy, the votes are being cast

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The Independent Online

While Gordon Brown was setting out his vision for tackling global poverty yesterday, the Institute for Fiscal Studies was presenting its analysis of just how impoverished the Chancellor's own finances could soon begin to look. The IFS reckons he will have to raise taxes by £11bn in order to finance his spending plans. As Oliver Letwin, his Tory shadow, helpfully pointed out, that would take £1,000 a year out of the pockets of the typical working couple on average wages.

The £11bn tax hike is the IFS's best estimate of what Mr Brown needs to raise now to keep the nation's finances on track and stick to his self-imposed golden rule of borrowing only to invest over the economic cycle. It gets worse the longer he waits and if there was an emergency Budget after, let's say, a May election, the figure would be £13bn.

Morgan Stanley, which co-produced the Green Budget with the IFS for the first time, had even more fun with its computer models and came up with a worst case scenario in which house prices crash, the economy plunges into recession and the budget deficit soars to £90bn.

Fanciful? Perhaps. But it was not the only bit of bad news to steal the limelight from the Chancellor and suggest that he is viewing the economy through rose-tinted spectacles. House prices fell for the seventh successive month, according to Hometrack, while mortgage arrears rose for the first time in six years. The Office for National Statistics meanwhile declared that manufacturing industry is now officially back in recession. The credit insurer Euler Hermes forecast that UK insolvencies would rise 10 per cent this year to 60,000.

The better news for Mr Brown was that the economy overall expanded slightly more strongly than expected in the final quarter of last year, thanks to the service sector, putting it on course to hit his 3-3.5 per cent growth forecast and enabling the Treasury to say there was no question of the golden rule not being met.

But the golden rule is the least of the Chancellor's worries since it is a political construct which he can bend at will. The simplest way of ensuring it is met would be to move the goalposts and declare the end of the economic cycle this fiscal year rather than in 2005/06, which is the Treasury's current assumption. That would be a perfectly respectable manoeuvre since it would bring the Treasury into line with the thinking at both the Bank of England and the OECD. However, it would leave the Chancellor with an even bigger budget deficit as the next cycle begins.

The thing which matters in the end to voters is what is happening in the real economy. Yesterday in the real economy, a chain of department stores collapsed, a thousand more jobs disappeared at two drug manufacturing plants and the only remaining coal mine in the North-east closed. Unless the statistics are lying and the vast majority of City pundits have got it quite wrong, then something quite important is taking place. The long bull market in property is at an end and people are saving more and spending less. They are, in other words, beginning to batten down the hatches.

Mr Blair, one presumes, will hang on until May to put as much distance as possible between the disaster of his Iraq adventure and polling day. But the economy will surely prevent him waiting any longer. If only the Opposition was more credible, it could be a close-run thing.

View from the Pru

One good set of insurance sales figures does not a life industry recovery make. But three in a row? In quick succession Legal & General, Norwich Union's parent company Aviva and now Prudential have given the investors and policyholders something to smile about after three years of misery.

Perhaps the most eagerly awaited performance was that of the Pru after last October's £1bn rights issue shocker. For once, the chief executive Jonathan Bloomer did not disappoint. Sales were up in all three of Pru's main regions and the management is now confident enough in its UK prospects to predict it will achieve double the expected industry growth this year.

The share offer was designed to give the Pru the funds to exploit that domestic growth and, although the strategy was abysmally communicated to the outside world, the evidence points to the gamble paying off. Mr Bloomer has now shot the messenger and appointed a new group communications director, and sales are heading in the right direction. Stripping out the effect of December's annuity deal with Royal London, the Pru's premium income in the UK and Europe rose by a very respectable 21 per cent last year without it having to pay bigger commission rates to intermediaries. Moreover, it was spread across a broad range of products from conventional unit-linked investments to esoteric offshore bonds.

Given that L&G and Aviva also enjoyed strong growth last year, the received wisdom is that they, along with the Pru, are taking business away from some of the smaller players in the market and not each other. The ability of the big three to sustain that pace will depend on a variety of things, not least the performance of the stock market and the absence of any more self-inflicted public relations disasters. Thanks to something called depolarisation, high street banks can now choose to offer a menu of products from a small range of providers, rather than being tied to one provider or none at all. The Pru thinks this will separate the men from the boys and allow it to tie up some juicy distribution deals. However, Bradford & Bingley decided to abandon its status as an IFA selling anyone's products only to instead enter an exclusive single tie arrangement with L&G.

But at least Mr Bloomer no longer has his back to the wall. The shares are up nearly a fifth since last October and policyholders can look forward to one of the better annual bonus declarations next month. There may be life left in him and the Pru yet.

National Lottery

Think lucky, says the actress Fay Ripley as she appears in our living rooms with that irritating little unicorn at her side (aka Graham Norton). Well, at least Camelot's latest advertising slogan beats Live a Lotto. In an effort to ensure that someone other than the incumbent has a chance of getting lucky when the licence comes up for grabs again in 2007, the National Lottery Commission wants to make the bidding process more appealing. The last competition ended in a farce when Sir Richard Branson's People's Lottery, having spent £20m on its bid, was first awarded the licence and then stripped of it after the courts decided there would not be enough money left to distribute to good causes once all of Camelot's suppliers had been replaced.

With the criticisms of the National Audit Office still ringing in its ears, the Commission is now toying with the idea of running a two-stage bid process to cut down on costs and then reimbursing unsuccessful bidders. It may also allow the preferred bidder to choose its technology partner after being selected.

Lottery sales are now back on an upward trajectory but with the profit margin fixed at a ha'penny in the pound it will never be a licence to print money unless you are supplying the kit. That makes it a natural concession for a not-for profit operator like Sir Richard. But does he feel lucky?