Stephen King: A Chancellor's luck can always run out, and a chilly wind is blowing in Downing Street

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The Independent Online

"Bah, Humbug!" I was hoping to write an uplifting Christmas tale. I thought I might be able to offer a ray of economic hope. Regrettably, though, I can't. I have no desire to be another Ebenezer Scrooge, but I can do nothing about the facts in front of me.

Sadly, the UK economy appears to have run out of luck. No amount of visits from the ghosts of Christmas past, present or future is likely to make much difference. While many of you will be rushing to the Christmas tree tomorrow morning, ripping open your presents and cursing your great aunt for buying you a bottle of Katie Price's "Stunning", Gordon Brown and Alistair Darling will be huddled over their Glemorangies, listening nervously to the rattling windows of Numbers 10 and 11 Downing Street and wondering whether the chill winds of recession are about to engulf them.

I've always thought it odd that politicians think they can take the credit for a nation's economic performance. While it's true that some politicians are economically luckier than others, it's less obvious that their judgement is necessarily any better.

The UK avoided recession in 2001 when many other countries succumbed, but I'm not convinced this was the result of canny or prudent decisions taken by Gordon Brown when he was Chancellor. Instead, he was lucky, both because he inherited a strong fiscal position from the previous government and because he decided to go on a spending spree just before the global recession struck in 2001, a downswing which the Treasury hadn't predicted.

The biggest problem for seemingly lucky politicians is, of course, that their luck runs out.

I worked at the Treasury in the mid- to late-1980s when Nigel Lawson was Chancellor, and, for a while, he was the luckiest man alive. Inheriting a recovering economy from Geoffrey Howe, who had made some brutally tough decisions earlier in the decade, Mr Lawson was able, for a while, to ride the waves of an economic boom, allowing Margaret Thatcher in 1988 to describe his budget that year as "quite the most brilliant we have seen". It was "brilliant in concept, brilliant in drafting and brilliant in delivery". Given the dangers associated withthe October 1987 stock market crash, "Nigel handled everything marvellously."

Already, though, Mr Lawson was beginning to lose a little of his earlier lustre. The economy was showing signs of overheating, inflation was on the rise, the balance of payments was deteriorating rapidly, and there were the first signs of internecine warfare over Europe.

Mr Lawson is now remembered more for the inflationary excesses of the very late 1980s, a time of yuppies, fast cars and excessive champagne, than for the economic successes earlier in the decade. His problem, I suppose, was an inability to distinguish between the genuine underlying improvements in the UK economy in the 1980s the growth rate picked up relative to the UK's competitors and relative to its own earlier experience with the over-indulgence that paved the way for the subsequent recession.

This government's economic pedigree is now being subject to an uncomfortably probing re-examination. Difficulties have been apparent for a while now. The trade-off between growth and inflation has been less encouraging in recent years. For any given growth rate, inflation has been higher than it used to be.

The Northern Rock fiasco cannot easily be excused. This was the first bank run since 1866, the only serious bank run involving retail customers anywhere in the world during the current financial crisis, and, ultimately, a banking failure that tripped up the tripartite system set up all those years ago by one Mr G Brown.

The housing market appears to have hit a brick wall in recent months. Turnover is down, prices are declining and the buy-to-let market is in big trouble. Estate agents have suddenly started being nice to prospective buyers, a sure sign that there really are deep-seated problems in the property market.

But for me, an economist of 1980s vintage, there is one statistic that makes me worry more than any other. Last week, the Office for National Statistics revealed that in the third quarter of 2007, Britain's balance of payments was in the red to the tune of 20bn, a most unfortunate new record. Admittedly, the economy is now a lot bigger than it used to be, but even as a share of national output, the numbers are still enormous. The ONS reckons the deficit now amounts to 5.7 per cent of GDP. The only other time the deficit reached this size was funnily enough at the end of 1988 and in the third quarter of 1989, when the Lawson express train was showing the first signs of coming off the rails.

This revelation is a bolt from the blue. It's not just the news in the third quarter that's shocking. The ONS has also rewritten history. Those of a Stalin-esque temperament would normally have no qualms about this kind of activity, but the latest numbers make for very uncomfortable reading indeed. Britain has been living on foreign credit and borrowed time to a far greater degree than previously thought. Earlier estimates suggested that the current account had been in deficit to the tune of 2.8 per cent of GDP in the first half of 2007. It now seems that the deficit was actually 4.5 per cent of GDP.

While policymakers have fretted about the US current account deficit, little has been written about the UK's problems. It turns out, though, that as a share of GDP the UK deficit is as big as America's. And just like the US, the UK economy has motored along on a diet of debt and ever-rising house prices.

To claim, then, that the sub-prime and credit crisis was born in the United States alone is nonsense. The UK, having borrowed heavily from abroad to invest in a booming housing market, now has to face up to its own sub-prime crisis. The Bank of England will have to cut rates further, but as it does so, sterling may end up falling rapidly (indeed, the downward adjustment is already underway). A weaker currency will, in turn, raise questions about ongoing price stability.

Meanwhile, Alistair Darling won't have his master's luck. Unlike Mr Brown, Mr Darling has inherited a relatively poor fiscal position, and simply won't have the opportunity to provide a fiscal bailout unless he breaks his master's rules. The economic challenges in the second half of 2007 may turn out to have been only a warm-up act for the main event. Mr Brown and Mr Darling may find that, despite all those years of prudence, 2008 will be the year when recession becomes a genuine threat.

You might get a bottle of "Stunning" in your Christmas stocking tomorrow, but stunning will not be the word to describe the UK economy's performance in 2008. No more boom and bust? I somehow doubt it.

Stephen King is managing director of economics at HSBC

stephen.king@hsbcib.com

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