A healthy economy is a worrying one

As long as we remain surprised by our economic success and fearful it could end, we may be all right

It is not just Gordon Brown who says it. Remember his praise last week for the economic performance of this country. The longest period of uninterrupted growth for 200 years? Faster growth since 2000 than the United States, Germany France and Japan?

It is not just Gordon Brown who says it. Remember his praise last week for the economic performance of this country. The longest period of uninterrupted growth for 200 years? Faster growth since 2000 than the United States, Germany France and Japan?

Let me add two more. According to a study by Goldman Sachs, Britain overtakes Germany as Europe's largest economy within a generation. And in the International Herald Tribune yesterday there was a report about the fate of Germany's largest bank, Deutsche Bank, which contained the quote from a Frankfurt banker: "let's face it, decision-making is already in London."

It all seems a very long way from the strike-ridden 1970s and even the early 1990s, when it was fashionable to praise the German and Japanese economic models and argue that Britain should follow their example. Those of us who spotted that this country was starting a run of success knew that view was rubbish. But even the optimists among us have been surprised by the way the country has come through the world downturn without missing a beat.

Indeed the self-adulation of our Chancellor last week has to be set against the fact that both as individuals and as a country we have borrowed a huge amount to support this growth. His own government has borrowed much more than he expected even a year earlier and his future spending plans are reckoned by many to be impossible to meet without tax rises.

So it is a fair question to ask whether our economic success is really durable, as the Government would argue? Or whether we have just puffed ourselves up with other people's money, as the Opposition claim?

The trouble is that there is some merit in both views. Yes, the underlying economic success looks pretty solid but there is no doubt about the reliance on borrowed funds. The trick is to gauge correctly the balance between the two positions, for on that will turn whether the British economy has another successful decade or a rather disappointing one.

It is easier to make a judgement about the dependence on borrowing than it is about the comparative advantage that the country seems to have sustained. As far as personal borrowing is concerned, there is little doubt that we are close to the prudent limits. To take just one measure, more mortgage loans are being taken by people seeking to rent out property than by first-time buyers. The housing boom means that the ratio between house prices and earnings is at the top of its post-war range, at around five times earnings. It cannot prudently go much higher. So the housing market is vulnerable and were house prices to fall, many people would feel the need to cut back on their spending.

Government borrowing looks more manageable in the sense that by historic or international standards it is not that high. But we have had a huge swing from budget surplus to deficit, a swing almost as large as that in the US, so the plain fact is that a lot of the demand in the economy has come from public borrowing.

My guess is that there will indeed be a reckoning and that for whoever wins the next election there will be three difficult years. It is too far away to see the balance between tax increases and slower growth in public spending but I'm sure we will have to get used to much slower growth in consumption. Instead of spending 3-4 per cent more each year, we will be able to spend only 1-2 per cent more.

But it is possible to believe that we have borrowed too freely and still buy the basic proposition that by European standards at least, this is a very competitive economy. We have, I think, done three big things right.

First, we have managed to create a climate that encourages employment. That has been Europe's failure. Just today, two professors at the London School of Economics, Richard Layard and Stephen Nickell, published a report arguing that the UK, with Denmark and the Netherlands, have fine-tuned their welfare systems and employment laws to cut unemployment and boost jobs. France, Italy and Germany have so far failed to do so, with the result that all have unemployment above near 10 per cent.

Second, and this was more by accident than by design, we were swift to get out of areas where we were uncompetitive. There were huge social and human costs in closing coal mines or scaling back mass manufacturing. But by doing this early we do not have the overhang of industries that are not going to grow and which will be ground down by cheaper competitors in Eastern Europe and Asia.

To say that is not to damn all manufacturing. Just this week Rolls-Royce produced some very good results, showing that in a high-end craft manufacturing business such as aircraft engines, the country is wonderful. What it is to say is that because we no longer have a large low-technology tail, our manufacturing is probably more sustainable than that of most other European countries.

And the third thing, again more by luck than judgement, that we have right is to be in the growth sectors that are hard for others to enter. Obviously financial services counts at the top but there is also pharmaceuticals, the media/communications area, the creative crafts, and above all, education. Our universities are second only to the US in the world league.

I think it is reasonable to believe that this position is sustainable. Much of the criticism of the present government is over its tax and regulation policies, along the lines that while we still have some advantage over the rest of Europe, the gap has narrowed. The gap has narrowed and will narrow further as Germany, in particular, works to cut tax rates and loosen regulations.

There is certainly something in that line - you would not hear almost every business executive say so if there was not some merit. But there are other areas where we may be loosing ground thanks to public policy. The most obvious is education. Our universities are under enormous pressure, and it may well be that we are living on the talent of middle-aged dons that will soon retire, without nurturing people to replace them. Every time a top academic bunks out to the US, it chips away from the reputation of a British university and adds to that of the American one.

I worry too about the dependence of the whole economy on that of London and the South-east. The London story has been an astounding one, becoming on almost any measure, the most international place on earth.

I said to a top City official the other day that I was worried it might lose its lead. "Where to?" was the reply. And that is right. There is no other city in this time zone that can really challenge it. Ten years ago you might have said Paris; some people even said Frankfurt. The two other great global cities have suffered: New York from the aftermath of the terrorist attack and Tokyo from a decade-long recession. Both should not be underrated but they have, for different reasons, turned into themselves, whereas London has turned out. But too many of our eggs are in one basket. If the London economy were to crash the UK would be in terrible trouble.

So it is right to be worried. Indeed we must be worried because if we are not, we could slither into that 1950s complacency that scarred the country for so long. But as long as we remain surprised by our economic success and fearful that it may be snatched away, we may be all right.