John Major's problem is the twin deficits on the Government's accounts and the balance of payments. They are unsustainable, but they can disappear only by transferring most of the fruits of growth during this recovery to foreigners by means of exports, and to the Exchequer in taxes. There can be no feelgood boom.
The penitent nature of the recovery - all hard work for little extra reward - is the mirror image of the self-indulgent Eighties. Under Margaret Thatcher, the country consumed a good deal more than it was able to produce, giving most people the feeling that they were getting something for nothing. But the trick was pulled off by means of borrowing. It could not go on.
Two figures sum up the central problem of living beyond our means. The average growth of consumers' spending in the Thatcher cycle from 1979 to 1989 was 3.1 per cent a year. (As the graph shows, the growth during the boom of 1986 to 1989 was far higher.) But the average growth of national output (real GDP) was 2.3 per cent a year over the same period, leaving a gap each year that could be met only by imports. The trade deficit soared.
(These particular years are chosen because it is important to compare the same sort of years - either peaks or troughs in activity - from one economic cycle to another. Otherwise, the figures are distorted by the normal variations around the trend. Both 1979 and 1989 were peak years for activity.)
Norman Lamont, in his resignation speech, was certainly right to blame the recession on the boom. Nigel Lawson's belief in his own propaganda about an 'economic miracle' caused the payments deficit to surge to more than 4 per cent of national output in 1989. Clearly, such a deficit has to be curbed. Foreigners' appetite for Britain's IOUs is finite. At some point, they would stop accepting them, causing a damaging run on sterling, a sharp rise in interest rates, and a halt to spending.
One of the most worrying features of this recession is how little progress has been made in correcting these Thatcher-Lawson imbalances. The second graph shows that consumers' spending remains at a far higher level, compared with output, than was the case in the early Eighties. Ideally, GDP would slowly have caught up with spending. But the downturn in spending has also driven down GDP.
As a result, the balance of payments deficit was still 2 per cent of national output last year. At the equivalent stage in the 1979-81 recession - in 1980 - there was a balance of payments surplus of 1.2 per cent of national output. A central task of policy now has to be to encourage output; to discourage spending; and to close the gap between the two.
The Government's budget deficit of taxes over spending also implies a cycle in which there will be exceptionally slow growth of real post-tax incomes and spending, regardless of whether it is tackled by cuts in public spending or increases in taxes. Cuts in spending will cut someone's income, whether the income of public sector workers or of government contractors. Increases in taxes will merely spread the burden more widely. Either way, curbing the deficit will involve restraining income and spending growth.
The figures do not look encouraging. The Treasury officially projects that this year's deficit will reach pounds 50bn or 8 per cent of national output. As the recovery cuts spending on benefits and boosts tax revenues, the deficit may shrink to 4 per cent of GDP. Half of that can be justified on the grounds that it is matched by investments that will yield a long-term return. Another half probably needs to be tackled over time. Curbing the deficit by pounds 12.5bn implies, for example, a rise in the basic rate of income tax of 8p in the pound.
However, there is no point in becoming depressed by precise numbers. Both the balance of payments deficit and the budget deficit represent differences between two sets of much larger figures. Relatively small changes in exports or imports, or in taxes or public spending, can have big effects on the gap between them.
If we are lucky, both problems may prove to be less acute than they seem at present. Maybe the budget deficit will respond more rapidly to growth than most economists expect, so that more than half of it disappears in the natural process of recovery.
There was not much sign of improvement in Friday's trade figures, but perhaps the better performance of Britain's manufacturing industry - including the sharp growth of Japanese car production - will make the trade deficit less of a problem during the recovery.
But these are speculations that are unlikely to change the essence of Britain's strategic economic problems. The key point is the trade and budget deficits are so large and so persistent that it is unlikely the Government can wriggle off the hook, even if the order of magnitude is a little smaller. We need a prolonged period in which we work harder to pay foreigners and the Exchequer.
The society and politics of such a period of restraint are clearly different to the Eighties. Champagne, yuppiedom, Sir Tim Bell, big mortgages, and flaunting it if you have got it are all out. The mood music is probably about shared sacrifice, hard work, striving and saving. The tones are probably sombre. If the old theory that hemlines go up in a boom is right, hemlines will stay down.
The politics are likely to be difficult if only because the politics of restraint - whether of tax increases or interest rate increases - always are. Mr Major and Kenneth Clarke would be wise to reconsider Bank of England independence, as Mr Lamont has again proposed. I went into pros and cons here four weeks ago discussing the French proposals, but there is an additional political argument.
Three of the last four chancellors - Lords Howe and Lawson and Mr Lamont - are in favour of giving the Bank control over interest rates, two of them arguing the case even when they stood to be stripped of their powers. They simply point out the political difficulty of raising interest rates. There is always a good reason for delay, whether a pressing by-election or just a fond prime ministerial hope that it is unnecessary.
The ability to blame the monetary authorities for boneheadedness is useful. The US treasury secretary and the German economics minister are almost always in favour of lower interest rates. The politicians get their scapegoat, but the country gets the interest rate decisions it needs. Given the strategic problems facing our economy, Mr Clarke and Mr Major should think again about where their own interests lie. Let the Bank of England take the blame for our hairshirt recovery.Reuse content