Subsidence in the house that Ken built

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THE FOLLOWING extracts are taken from the 1995 edition of Old Kondratieff's Almanack (MIT Press), an annual collection of foolproof predictions for the economics profession.

JANUARY Sir Terry Burns, the Treasury's Permanent Secretary, announces that his department is vacating its offices next to Parliament Square because of damage from work on the Jubilee Line underground extension. Osaka-based Shirayama agrees to exchange the building - which it plans to turn into a multi-screen cinema and noodle bar complex - for the former GLC headquarters across the Thames at County Hall. Sir Terry cites the Treasury's move south of the river as evidence that it is shedding its metropolitan bias and getting more in touch with the real world. Government statisticians meanwhile announce that the economy grew by 0.9 per cent in the fourth quarter of 1994 and 4 per cent over the whole year.

FEBRUARY The Bank of England warns in its quarterly Inflation Report that "evidence now tentatively suggests that the amount of spare capacity in the economy may be approaching the point at which it is diverging significantly from its level in recent months". In an unusually hard-hitting passage, the Bank concludes that "the authorities may have to take these developments into account in coming months when deciding if, when and in what direction monetary policy should be further adjusted". Headlines in the following day's newspapers vary from "Bank signals higher interest rates" to "Interest rates on hold, says Bank". Inflation slightly lower than expected. Gilts rise.

MARCH Cracks appear in Treasury's new building because of unsuspected subsidence problem. The Chancellor announces that private finance will be sought to help pay for repairs. Sir Terry announces that 32 senior Treasury officials have responded to his request for voluntary redundancies, but that all are indispensable. So 23 other officials are fired instead. Inflation turns out slightly higher than expected. Gilts tumble.

APRIL Central Statistical Office announces that the economy grew by only 0.1 per cent in the first quarter. Norman Lamont accuses Kenneth Clarke of pushing the economy back into recession by raising taxes too far and urges him to cut interest rates. JohnMajor finishes keynote speech to gloomy Conservative regional conference with reassurance that "we have never had it so good, we are still having it good, and I tell you here today that we will continue to have it good".

MAY Seventeen of the 32 Treasury officials who applied unsuccessfully for voluntary redundancy leave to set upconsultancy. Most of 23 sacked officials have to be rehired. Department of Employment announces companies employ more women than men for first time since Second World War. Fall in unemployment slows as number of women seeking work accelerates.

JUNE Shadow Chancellor Gordon Brown makes keynote speech at a conference on New Labour's New Economics. "New Labour will conflate the insights of a neo-Ricardian approach to distribution with a post-monetarist neo-New Classical real business cycle theoryto boost the economy's warranted rate of growth by the encouragement of pseudo-exogenous technology shocks," he tells baffled delegates.

JULY Treasury ministers depart for summer holidays, leaving their officials to run the economy. The pound surges, inflation drops unexpectedly and the CSO revises its estimate of growth in the first quarter to 0.6 per cent and in 1994 to 4.5 per cent. Growth accelerates to 1 per cent in the second quarter. The Chancellor returns from Tuscany late in the month to find Eddie George demanding an urgent meeting to agree a three-quarter point rise in interest rates to 7 per cent. A pollthen shows the Government in third place behind Labour and the Liberal Democrats.

AUGUST A rash of newspaper reports appear predicting a £4bn cut in taxes over three years in the Budget. The Bank of England Inflation Report warns that "the stance of fiscal policy may influence decisions on interest rates in the context of its implications for inflationary dynamics". "Bank dashes Tory tax cut hopes," the press concludes. Government statisticians reveal surge in investment and deterioration in trade balance as imports of capital goods boom.

SEPTEMBER Kenneth Clarke holds press conference to announce half-point rise in interest rates to 7.5 per cent. He argues that the move is a testament to the strength of the economy and the Government's resolve to keep inflation down. He angrily denies being "bounced" into the decision by Mr George. But Rupert Pennant-Rea, Deputy Governor of the Bank of England, tells a Social Market Foundation meeting that inflation would already be out of control had the Bank not forced Mr Clarke to raise interest rates "on more than one occasion". Mr Pennant- Rea is told that his contract is not being renewed.

OCTOBER Chancellor appears daily on television claiming that "we will not cut taxes until it is safe to do so".

NOVEMBER The Budget includes a £12bn tax-cut package to be phased in over three years if the Tories are re-elected, with the basic rate of income tax reduced to 20 pence and duties on alcohol cut sharply. The surprise is a new 55 per cent higher rate of tax introduced on earnings over £500,000 a year, which is hailed as an overdue slap in the face for greedy bosses by the tabloids. Government spending and borrowing targets unchanged, but criticised as implausible by economists. Shares and gilts rise sharply on hopes of Tory election victory as poll rating jumps by 10 percentage points. Tony Blair says Labour will "reconsider" the tax cuts when his party is elected.

DECEMBER Year ends with economy having grown by 3.6 per cent, underlying inflation at 2.75 per cent and unemployment at 2.2 million. After six months in the black, the current account moves back into deficit as imports pick up again. Mr Clarke announces that he has rejected a request by Mr George to raise interest rates again, arguing that his tax cut package is justified because reforms such as privatisation and trade union laws have raised the rate at which the economy can grow without fuelling inflation to "around" 3 per cent. Mr George announces on New Year's Eve that he is "considering his position", leaving City economists to predict that 1996 will begin with the pound facing a bloodbath.

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