On 27 June last year, Alistair Darling was presumably a very happy man. The newly-appointed Chancellor of the Exchequer had seemingly inherited a remarkably healthy economy from his predecessor. Growth was strong, inflation was a little elevated but not too troubling, the public finances weren't great but, with the economy continuing to expand rapidly, were likely to improve, and it was only a matter of time before an election would be called ...
Well, all of that was a long time ago. Mr Darling is now facing an extraordinary challenge. He has the responsibility of preserving the Government's economic reputation at a time of immense stress. None of it is really his fault.
He can't be held responsible for the sub-prime crisis. He wasn't the architect of the tripartite arrangements which almost failed during the Northern Rock debacle. He wasn't responsible for the Government's failure to control the public finances in earlier years (each Budget has promised an improvement in future public finances but the improvement never materialises).
Nevertheless, the challenge is his. And, should he fail, the Government's economic credibility may be left in tatters. To understand why, it's worth reflecting on the economic record under New Labour so far.
Average annual economic growth since the Government came to power in 1997 has been 2.8 per cent. That is an outstanding result compared with the records of earlier administrations of either political hue. Under the Tories, growth in the 1980s and 1990s averaged 2.2 per cent. Labour's record in the 1970s was dreadful, with growth of only 1.5 per cent. You have to go back to the so-called "Barber Boom" of the early 1970s to find a comparable period of strong growth. That, though, only lasted a handful of years before coming to a sticky inflationary end.
Why do the numbers look so good? The Government argues, of course, that the persistent strength reflects Bank of England independence (which has kept inflation in check), fiscal prudence (which has prevented excessive government borrowing) and public sector reforms that have unleashed a sustained improvement in productivity.
Those claims, though, will be tested to the limit in the next couple of years. Inflation is too high. The fiscal position has deteriorated. And the jury is still very much out on whether there has been any productivity improvement in the public sector.
More important than any of those factors, though, has been the Government's ability, so far, to avoid the economic disasters that plagued earlier administrations. No devaluations, no inflationary scares, no winters of discontent and, most importantly, no recessions. The avoidance of earlier "boom-bust" cycles has been a significant prize.
In yesterday's speech, Mr Darling was very happy to point out that "Britain is better placed than other economies to withstand the slowdown in the global economy". I'd imagine that any finance minister worth his or her salt would say the same thing. Ultimately, though, the global economy is slowing and it's highly unlikely that the UK economy will prove to be immune. Indeed, I'd argue that the UK may prove to be one of the bigger contributors to a global slowdown.
Like the US, we've had a housing boom. Our house prices are remarkably high compared with our annual incomes. We operate in the shadow of a mountain of household debt. Just like our American friends, we have a very large current account deficit. And whereas we used to talk about London's strengths as a world financial powerhouse, that surely is a double-edged sword.
As financial markets implode, there are good reasons for thinking that the UK will be more vulnerable than most.
The Chancellor, of course, is not going to admit fully to those risks. Instead, he's putting on a brave face, pretending all is well in the hope there won't be a collapse of confidence. His bravery, though, also reflects his desire to maintain fiscal credibility.
One of the guidelines he inherited from his next-door-neighbour was the so-called "sustainable investment rule", which restricts the level of government debt to no more than 40 per cent of GDP. Remarkably enough, he manages to do just that. He reckons the debt ratio will reach 39.8 per cent of GDP by 2010-11, just a whisker below the maximum allowable.
That marks an upward revision compared with the pre-Budget report, a reflection of weaker economic growth and, partly as a result, lower tax revenues. Mr Darling is basing his projections on a GDP growth rate of 1.75 per cent in the coming fiscal year followed by a 2.5 per cent gain in 2009-10, a reduction in both fiscal years of 0.25 percentage points.
Imagine, though, that growth comes in a lot lower. Let's say there's a global recession that leaves the UK growing at only 1.25 per cent this year and 1 per cent, in 2009-10. By past standards, that would be a relatively mild economic slowdown but it would surely blast a hole below the waterline of his fiscal rules. The debt/GDP ratio would easily rise above 40 per cent of GDP.
Does it matter? I don't think so. I just wish the Chancellor had taken the opportunity yesterday to explain what would happen in those circumstances.
There's certainly a hint in his speech, where he said "given the fundamental strength of our public finances, it is right to allow fiscal policy to support monetary policy in the period ahead in helping to maintain stability in the face of the global downturn."
He hasn't, though, dealt with the obvious problem: what happens if the fiscal rules demand tightening which contradicts the likely further easing of monetary policy? Indeed, it's almost as if he's fixed his GDP growth forecasts to deliver the appropriate outcome for government debt.
He'll have only himself to blame if he's forced into an admission later he's failed to meet the fiscal rules. It would have been better to confront the problem now, explaining the circumstances under which the rules could be lifted for a year or two, rather than adding to future policy uncertainty.
Ultimately, Mr Darling is keeping his fingers and toes crossed. A recession would be a disaster both because of timing – election fever will presumably hot up again in 2009 – and because of the damage it would do to Labour's credibility on the economy: suddenly those average economic growth rates wouldn't look quite so impressive relative to the achievements of earlier administrations.
A hard landing, though, cannot be ruled out. The UK, like the US, has survived these past few years on a diet of ever-rising house prices and debt. We have, so far, had only the first taste of the hangover to come.
The writer is the managing director of economics at HSBC