Here comes the Clarke boom, with all its grief

Whoever wins the election, the next government will be faced with hard economic decisions

It is the week of the poisoned chalice; the week when, quite suddenly, people have started to acknowledge that the Tories might conceivably win the election after all. For even before the help from Ms Short, the opinion polls had started to show a clear narrowing of the gap. Whether this narrowing is really meaningful is another matter, but there is at least a possibility that the Tories might have to cope with their own economic legacy.

On the face of it that might not seem too unwelcome a prospect. After all if they were to win, it would have been thanks to the aura of economic success - low inflation, low interest rates, falling unemployment, decent growth, modest tax cuts, and a sharp rise in consumer spending. Are these apparent successes a mirage, a con trick? Not completely, for these are the fundamentals of long-term success. But there is poison mixed in, and the poison is called "boom".

Some politicians have -ism or -ite attached to their names, as in Thatcherism or Blairite. But the names of Tory chancellors tend to become associated with economic excess, as in the Maudling boom, the Barber boom or the Lawson boom. It now looks very much as though the next six months will see a Clarke boom, not perhaps quite as red-blooded a fellow as the others of the tribe, but bouncy enough to give the next government considerable grief.

You can see the boom in this month's car sales, which will probably be the best for seven years; in the rise (at last) in house prices and the associated surge in sales of things people buy when they move home, like carpets and washing machines. But there is much more to come. In the next few months many people will suddenly feel quite a lot richer. And then, in about 18 months, equally suddenly, the mini-boom will come to an end.

It will come to an end for at least four reasons. First and foremost the surge in consumption is not sustainable, though for a somewhat different reason from previous booms. Then it was a combination of rising inflation and a balance of payments crisis. This time there is a bit of those, but it will be more because the main thing propelling the additional consumption is the windfall people have made from building society share sales. One city economist, David Mackie at JP Morgan, calculates that building society share sales next year will put pounds 16bn into people's pockets. That is equivalent to 3.5 per cent of consumer spending. So if only half is spent and the rest saved, there would still be nearly another 2 per cent on spending, on top of whatever increase would have taken place anyway.

Second, there will be some rise in inflation and interest rates. Just this week the Bank of England's Inflation Report warns that, while in the short-term inflation will continue to fall, unless policy is tightened at some stage it will rise in the next two years. Unless interest rates are put up fairly soon (it did not give a date, but most people reckon by the end of the year), they would have to rise more sharply at a later date. How much and when, of course, is guesswork, but you can work out what the City markets are guessing by looking at yields for various maturities of government debt. The answer there is that there will be little or no rise in interest rates until about May next year, but after that rates will rise steeply.

Third, fiscal policy will have to continue to be tightened: either taxes have to go up or spending will have to come down. For all the increases in taxation that have taken place, for all the downward pressure on public spending, and even with a growing economy, the harsh fact remains that the Government keeps missing its targets for cutting the deficit. It is creeping down, but it is still nearly 5 per cent of GDP, far above the Maastricht guideline of 3 per cent, let alone the 2-2.5 per cent level needed to stabilise the national debt/GDP ratio. Don't blame the EU. Blame harsh economics: arguably the Maastricht target is far too loose.

So, far from there being much prospect of tax cuts over the next five years, whoever gets in will probably have to increase taxes yet again, or cut spending in a much more radical way than the Tories have contemplated to date. Just as tour operators are loath to admit that the beaches are packed and the hotels crummy, neither of these options on fiscal policy is the sort of thing that politicians like to put in their election brochures.

Fourth, the next government is not going to have the benefit to public finance that successive Tory governments have enjoyed: the bonus of privatisation receipts. Even now, with the whole programme winding down, privatisation has been worth pounds 5bn or more a year. If they got back the Tories could scrape together a few more projects, like the Post Office and London Underground. It could raise a bit more by selling office blocks and other property. But basically the deal is done. There is simply not much left to sell, with the result that just to get back to the starting point a new government will be looking for another pounds 5bn of taxation, or another pounds 5bn of cuts. Again, not something you stress in the brochure.

So the boom will end whoever gets in. But the end will affect the parties in different ways because the voters will have different expectations. In the case of Labour, the main economic expectation would presumably be for improved public services; and at the cost of higher taxation something can be done on that score. Other bits of the Labour platform, such as constitutional reform, come quite cheap: it does not cost much to strip the hereditary peers of their votes.

In the case of the Tories, however, they have to deliver a cut in taxes. The ferocity which the present government has met has surely been generated in large measure by its failure to meet its promises on that score.

So if the prospect for the next five years will be tough for both parties, in some ways it will be even more difficult for a Tory government to meet the expectations of its supporters than it will for a Labour one. Clearly if they do manage to scramble back they have to make sure they can hang on through the full five years in the hope that the voters can forget the glum two or three first ones - a tactic of which they have some experience.