In the pre-election debate over economic prospects, David Smith favours the view of a new-age Britain, permanently more competitive, less inflation-prone and capable of sustaining growth.
The debate about Britain's economic prospects, as we enter the inevitable uncertainties of a pre-election period, can be easily summarised. On one side stand the history men, those who believe that, however good the economy looks now, it is merely flattering to deceive. In other words, as in the past, something nasty is waiting around the next corner to hit us over the head.
On the other side are the believers in a 'new age', those who think there have been fundamental changes for the better in the economy, which mean that Britain is permanently more competitive, far less inflation-prone, and capable of maintaining a good growth rate for long periods. The new-agers look forward with optimism, the history men wait for the disappointments of the past to repeat themselves. Who is right?
The 1980s false dawn
The history men have recent experience on their side. It isn't that long ago since many were suckered into believing that so transformed had the UK economy become that any risks you took with it were likely to be justified.
Thus, when we had the productivity 'miracle' of the late 1980s, a runaway consumer boom apparently didn't matter - payments deficits, however large, were easily financed, and it was right to cut taxes whenever the Government had the chance. As we now know, it was a false dawn. Improvements in one aspect of economic performance, manufacturing productivity, did not denote that things had changed so dramatically that politicians could get away with crass policy errors.
The new-agers, however, have even more recent experience to call on in evidence. I have lost count of the number of times over the past few years that economic forecasters, often backed by the Bank of England, have warned of the imminent return of inflation - which would have been a symptom that nothing has really changed - only to be proved wrong by the figures.
Let me try to settle the argument. Is the present combination of good growth and low inflation merely the lull before the storm, or is it something more permanent? I tend towards the side of the new-agers. The first important point in their favour is that, whatever happens over the next few years, it will not be a repeat of the late 1980s. The boom of that period was created by the coming together at the same time of a number of factors, in a never-to-be-repeated way.
In particular, it was the first consumer recovery in modern times in which credit was unrationed.
Nor are there any current symptoms, beyond very superficial ones, which match that period. The current account is close to balance, rather than in record deficit, and there is no echo of the boom in tax revenues which led the then chancellor, Nigel Lawson, to conclude that public borrowing was a thing of the past.
This does not, of course, mean that everything will be fine. The fears of the history men fall into the following three main categories. Inflation will re-emerge as a serious problem, although probably not until after the general election because monetary policy is too loose now. Second, the level of public spending and borrowing will remain too high. Taxes will have to go up after the election, whichever party is in power. It happened in 1992, so why not again? Third, and as before, the impression of sustained revival for British industry is a mirage. As the effects of sterling's fall (post-ERM) diminish, industry will be no more internationally competitive than before.
To take these in turn. The underlying measure of inflation, including mortgage interest payments, dropped into the Government's original 1-4% target range four years ago, and has remained there since. This has been the best run of low inflation since the 1930s. Other indicators support the view that something fundamental has changed. Average earnings growth, for example, which never dropped below an annual 7.5% increase in the 1980s, has been running at half that rate recently.
Small interest rate hikes
This does not preclude, of course, some rise in inflation over the cycle, or a further rise in interest rates to prevent it from developing into anything more serious. I would expect base rates at the end of next year to be at one or 1.5 points above where they are now. But the fact that it is possible to talk in terms of such small changes, underlines the degree to which things have changed.
As for the persistence of large budget deficits, these are in part, a side-effect of low inflation. Rising prices and earnings, were a traditional route through which governments could pay for their spending profligacy, because of the boost they provided for tax revenues. In a low-inflation environment this option is closed, although public spending should also be easier to control.
We should be wary, however, of assuming that an incoming government will have to take similar action to that of the Conservatives after the 1992 election. Then, you will recall, the full horrors of the public borrowing problem were only beginning to emerge. And horrendous they were - a public sector borrowing requirement scheduled to rise from a predicted £32 billion in 1992-3 to nearly £50 billion in 1993-4. By contrast, although borrowing has been stubbornly slow to fall, and will be about £25 billion this year, it is on a slowly declining trend.
There's little talk of miracles Finally, the vital question. Is UK industry now equipped with the basis for sustained revival? The most encouraging sign here, I think, is that unlike in the 1980s, there is precious little talk of miracles, productivity or otherwise. It is wrong to say that a low exchange rate has been the sole cause of a greatly improved export performance. Britain's position on relative costs, particularly labour costs in relation to Europe, is highly advantageous. The social chapter looms, but I doubt that will erode more than a small part of that advantage.
The history men are too gloomy about most things. Us new-agers can only hope that British industry also proves them wrong.