Stephen King: Back to the future with austerity measures that will test our tolerance

The tricky issue is that this Government, like those in the Seventies, may not have the mandate to deliver its austerity measures

Although I grew up in the Seventies, I remember very little from 1970 itself, having been only six years old at the time. The break-up of the Beatles passed me by, I can recall nothing about the 1970 World Cup, and I can only vaguely remember the general election that year, when a Mr Heath replaced a Mr Wilson. The only thing that made a deep impression on me at the time was man landing on the moon. I can still recall those grainy images in 1969 when Neil Armstrong uttered his now famous words. I decided I wanted to be an astronaut.

And then I grew up. Travelling on a large firework into outer space slowly lost its appeal. But things at home didn't seem particularly attractive either. My grandfather took my brother and me for a stroll through London in 1972 and, as we entered Smith Square, we walked into a riot. I was surprised to see grown men fighting with police. I discovered only much later that it was a key moment in a dock strike that had threatened to paralyse the nation.

The Seventies were marked by anger and discontent. Oil shocks, strikes, petrol ration books, power cuts, reading by candlelight, frequent elections, clueless politicians, incomes policies, horrible flares and, worst of all, terrible music. Yes, the economic and political suffering was nothing compared to the Bay City Rollers, Mud, Showaddywaddy and Donny Osmond. The decade, it turned out, was torture on so many different fronts.

And, the more I think about, the more I fear we're heading back to those dark old days. Admittedly, the music has probably improved (although I'm not sure that I would choose to listen to everything on my daughters' iPods). In other ways, however, the similarities are alarming. I'm not just talking about England's defeat at the hands of Germany in the World Cup. Like the Seventies, it seems as though our economy has lost its way. Only a few years ago, many politicians and other assorted guardians of our economic destiny thought they'd found the elixir of economic success, the equivalent of Harold Wilson's "White Heat" in the mid-1960s. It turns out that, like Mr Wilson, they were wrong.

Wilson was ultimately tripped up by an economy that was unable to deliver on his grandiose promises. Britain was a nation living beyond its means, constantly bumping into balance of payments crises which led, in 1967, to a humiliating devaluation and vague – and mostly false – promises about "the pound in your pocket".

Thereafter, politicians of different political hues offered all sorts of quick-fix solutions. Mainstream Tories launched a huge boom in the early Seventies which ended in inflationary tears. Others seized on Enoch Powell's 1968 "rivers of blood" speech, a nasty racist diatribe which has fuelled the thoughts of the anti-immigration lobby ever since (I wonder if Powell is revered in modern-day Arizona). Senior Labour figures didn't know which way to turn. Some wanted to leave the EEC and re-erect trade barriers. Those on Labour's left wanted to nationalise everything, while those on the right thought it was time to slash public spending. Meanwhile, the Liberals found themselves in disarray, primarily because a dog had met its death in suspicious circumstances.

So where are the similarities? Most obviously, we have again been living beyond our means. Nowadays we don't have balance of payments crises. Instead, we have debt crises which have seriously weakened the effectiveness of the financial system, have destroyed household confidence and have left the new Government having to deliver austerity on a scale not really seen since... well, since 1977, when the Labour government under Jim Callaghan was cajoled by the IMF into delivering draconian spending cuts. In response, Callaghan's government faced a motion of no confidence forcing him into a deal with the Liberals. Sounds familiar?

While financial markets have greeted George Osborne's Budget with tremendous enthusiasm – sterling is up and gilt yields are down – the Chancellor of the Exchequer has yet to reveal the details of his own draconian spending cuts. The strategy is clear: soften the electorate up for a few months before revealing the hideous truth on 20 October, when the details of the Government's Comprehensive Spending Review will be revealed like so many mutilated rabbits from a blood-soaked hat. Frankly, the Government has no real choice. The UK has a terrible fiscal position and the last thing we need is to face the ignominy of another visit from those charming men and women from the IMF to offer a bailout. The general election would then have been in vain. No party would have won because the IMF, and not Westminster, would be pulling the fiscal strings.

But there are obvious risks. The public sector is still heavily unionised. Pushing through major cuts is not easy – as British Airways has discovered. And the scale of the cuts in some Whitehall departments is truly gobsmacking. Declines in spending of 25 per cent or more will require a combination of imagination and sheer brutality. How much pain will the country be able to take? Already, the police are hopping mad.

The tricky issue is not so much that we have a coalition made up of strange bedfellows but, rather, that this Government, like those in the Seventies, may not have the mandate to deliver the austerity it is now promising. Before the election, each political party went out of its way to tell us it was in the business of protecting frontline services. At no point was there an honest debate about the scale of the cuts that would ultimately be needed.

As the Comprehensive Spending Review nears completion, will a new consensus emerge or, instead, will we find ourselves facing recurrent political mutinies? Callaghan and Dennis Healey, the then-Chancellor of the Exchequer, ultimately had to call in the IMF in 1977 because the Cabinet at the time simply couldn't agree on spending cuts. This time around, there's plenty of time to come up with the right answers, but there may well be plenty of political wobbles along the way.

And while the Government has to contend with our remarkable fiscal profligacy, the Bank of England is also wondering what to do next. With its newly expanded role, focusing not just on the achievement of price stability but also on financial stability, it will be looking for new tools with which to achieve its goals. In the Seventies, the so-called "Corset" was used in an attempt to constrain credit growth. It didn't work (corsets generally are used to disguise, rather than prevent, excess). Today, the talk is all about macro-prudential rules and counter-cyclical capital ratios for the banks. Perhaps these new tools will work. But they sound suspiciously like the Corset of old. In the Bank of England's own words, the Corset "tended to encourage the diversion of banking business into other channels". Will it be any different this time around?

Still, despite the threat of disorder and discontent, hopefully we'll avoid some of the worst experiences of the Seventies. No more power cuts, because a big chunk of our electricity is now provided by the French. And no more embarrassing fumblings at the school disco to the sounds of Leo Sayer and "When I Need You". Things may no longer be getting better, but they surely can't be that bad.

Stephen King is managing director of economics at HSBC