Stephen King: A warning for Blair - luck ran out for Tory premiers in their third term

In the 1987 election the Conservatives were trusted to run the economy - rather like Labour today

Strange things can happen, so I wouldn't like to pre-judge the results of Thursday's general election, but I'm going to assume, for the purposes of this column, that Labour win a third term. Not, perhaps, one of the more difficult assumptions that economists have to use from time to time, but an assumption nevertheless. By doing so, I can then ask the obvious question: how do governments fare economically when it comes to third terms in office?

Strange things can happen, so I wouldn't like to pre-judge the results of Thursday's general election, but I'm going to assume, for the purposes of this column, that Labour win a third term. Not, perhaps, one of the more difficult assumptions that economists have to use from time to time, but an assumption nevertheless. By doing so, I can then ask the obvious question: how do governments fare economically when it comes to third terms in office?

Another typical requirement for economists is the need for reams of data. Here, I'm afraid I'm going to have to disappoint you. In the past 60 years - since the end of the Second World War - there have been only two third terms. Both of these were achieved by the Conservatives - in 1959 and in 1987 - so, for Labour, it will be a new experience: and, for me, that means a lack of decent data.

If there is a lesson, though, from Tory third terms, it's that things don't always go to plan. It wasn't long before Harold Macmillan was replaced as leader by Alec Douglas-Home, and it wasn't long before Margaret Thatcher was replaced by John Major. In both third terms - and, for John Major, a fourth term - the stale whiff of corruption hung in the air - whether it was the Profumo affair in the early 1960s or the "cash for questions" disputes that bedevilled the Major years.

And, in both third terms, economic doubts crept in. Macmillan may have boasted that "you've never had it so good" but, by the time of the 1964 election, no one really believed that line anymore. Constant pressure on the exchange rate, associated with an awkward balance of payments position, had elicited the beginnings of a "stop-go" economic cycle. Although it was Labour that eventually succumbed to devaluation in 1967, the seeds had been sown in the earlier Conservative years. For John Major, the economy wasn't quite his undoing - the Tories managed, against the odds, to win in 1992 - but the recession was bad enough to reduce his majority to an unworkable 21 seats.

So I suppose there are two obvious issues to face up to. First, prime ministers, despite what they might plan, haven't managed to survive the third term in office of their government: both Macmillan and Thatcher eventually had to go. If history is to repeat itself - and I'm not suggesting that it needs to - we'd then have to contemplate life with a new prime minister and - who knows? - maybe a new chancellor as well. Second, achieving good economic performance seems possible over one or two terms but, during the third term, it's typically been the case that a government's luck has eventually run out. Economies do go wrong from time to time and, if they don't do so in the first few years in office, it's wrong to assume that they never will.

To date, Labour's record on the economy has been rather impressive. The table shows economic performance from 1955 to date and allows us to take a look at the relative success of each government based on a series of straightforward measures of macroeconomic success.

There's no doubt that, based purely on growth and inflation, the current government seems to have performed very well indeed. The Chancellor and his team have managed to achieve an annualised growth rate not far short of 3 per cent, the best performance since the early 1970s. And, unlike the Tories' experience back then, there's been no pick-up in inflation: inflationary performance in the UK in recent years has been the best there's been since the late 1950s and early 1960s. Investment doesn't look too bad either - not the best, but most definitely not the worst. The trade and current account deficits are bigger - although, with much more capital mobility around the world these days, this need not be a major problem in the short term - but the fiscal position has, for the most part, been very well behaved. All in all, it's been an impressive performance.

Of course, it's not entirely clear that this impressive mix of strong growth and low inflation is entirely Labour's making. The current government inherited a strong macroeconomic platform from the Tories on coming into office in 1997. And there are weaknesses: the UK's performance has not delivered the same kind of productivity growth that we've seen in the US, for example.

It's also worth noting, however, that the numbers in the table don't really compare like with like. Knowing how the Tories did over three or four terms isn't quite the same thing as knowing what Labour have so far achieved over two terms when they still have the opportunity to blow it all in a third term.

For example, although growth on average across the Tories' first two terms in office from 1979 onwards was no different from what they achieved over four terms, people's experience of the Tories in the mid-1980s was, on the whole, rather good. In the second term, the Tories achieved an annual GDP growth rate of 3.6 per cent. It may all have ended in inflationary tears and house price depression but, in the 1987 election, the Tories were trusted to run the economy - rather like Labour today.

So are there some banana skins out there, or will we see a continuation of the excellent performance of recent years? There are certainly some things to worry about. The one that's most obviously beyond Labour's control is the external environment. I doubt that higher oil prices provide much of a threat - although their impact may be to keep policymakers guessing over whether weak growth or higher inflation is the bigger risk. A much more worrying development would be the growth of protectionism, something that could cause global trade and capital flows to seize up.

Domestically, Labour will need to keep their eyes on the ball. The housing market has not collapsed, but consumers appear to have caught a chill simply as a result of softer housing transactions. A loss of consumer spending power would seriously undermine the economy's growth rate and, in the process, undermine the Chancellor's tax receipt calculations. The hoped-for pick-up in productivity is still in its infancy and may never materialise if the economy begins to slow. And the true test of the Government's reforms - the increase in public spending on health and education - is still a long way from being passed.

I don't think that this government has simply been economically lucky. It was a clever move to make the Bank of England independent and, by doing so, the credibility of monetary policy has doubtless improved, something that we all benefit from. But, so far, it most definitely hasn't been economically unlucky. When the first problems came, there was plenty in reserve to deal with them - when the technology bubble burst, for example, the Chancellor was able to loosen fiscal policy to support domestic demand.

But no longer does he have these reserves of ammunition. If something goes wrong over the next two or three years, there will be less room to offer a helping hand. Already, the growth of public spending is set to slow. If the Chancellor's fiscal arithmetic deteriorates further, he may eventually be forced to contemplate one of the two great unmentionables - tax increases or spending reductions. Only then will we know whether Labour really has the long-term support of the country or, instead, whether the country was prepared to vote Labour only because Labour hadn't yet been associated with the economic bad luck that eventually comes to visit governments of all political hues.