Clever economic dance needed to sustain boom
THERE is an ironic touch to the poster warnings to UK voters in the Conservative Party's election campaign: "Britain is booming - don't let Labour blow it."
For the main debate among private-sector economists is the degree to which the incoming government taking power on May 2 will have to dampen the boom to stop the economy from overheating. And it would be a brave punter who would take a bet against the Labour Party finally breaking 18 years of Conservative government.
So the Conservative poster may have a point, although few analysts can see the New Labour Party of Tony Blair actually "blowing it".
There is argument, however, about the extent to which economic conditions resemble those of the late 1980s, which led to inflation bubbling up to nearly 10% to be followed by the sharp recession which ushered in the 1990s.
In February, growth in consumer credit hit 17%, very close to the peak of the last boom. House prices are rising again, by up to 15% in the London area and 7% on average overall.
This week the Conservatives trumpeted the lowest unemployment rate for six years - 6.1% which puts the rest of Europe to shame. However, this has to be qualified by revelations that statistical fudging could mean the workless number is closer to 3-million than the official 1.7-million - indeed, the UK has admitted to the European Commission that in its figures for long-term unemployed "the claimant count was not fully adequate".
Consumption is strong, taking retail sales up by 4.4% in volume terms, and hence there is consensus that the demand-supply pressure will require some monetary fine tuning. There is also concern about the 1996/97 budget deficit, which came in almost £4-billion below the £26.4-billion expected - thanks to tight spending and improved revenues.
Congratulations on this achievement have, however, been muted by the fact that the UK is in its fifth year of growth. At the same stage of the last boom the Exchequer ran surpluses in 1988 and 1989 of around 1% of GDP.
This has led to some fears that the deficit could become more of a constraint when GDP growth slows - as economists feel it must - and that the new government will have to increase revenues somehow.
Labour will not raise personal direct taxes but, as the Conservatives have done, will find other ways.
Windfall taxes on the huge profits made by the privatised utilities could raise £5-billion over two years while reductions on allowances such as mortgage interest tax relief and limiting it on personal incomes could chip in another £5-billion.
Estimates by Salomon Brothers suggest this will allow the new government to introduce a new basic rate of income tax of 10% (to add to the current 20%, 25% and 40%) and allow a cut from 33% to 31% in company tax.
Meanwhile, the strength of the pound remains crucial to the outlook for inflation which is below 2.9%. Sterling's trade-weighted average has risen by 19% in the last nine months, spurred by October's 25 basis points rise in the base interest rate to 6% and latterly by the dollar's climb which the pound has followed.
It has finally regained its 1990 value, a level last seen just before September's European Monetary System debacle.
Part of the gain is posited on a further tightening in interest rates with market analysts expecting a base rate of between 6.5% and 8% to be imposed over the next 12 months. This will depend on the pound staying strong, holding down costs and increasing price competition at retail levels where imported goods from foods to computers are up to 15% cheaper.
Industry costs of inputs have also fallen by 7.6% - the fastest drop since the free-for-all in the oil market sent crude down to under $10 a barrel in 1986 - and manufacturing output prices are up just 1%.
The policy balance between warding off inflation which is not yet visible - with US experience suggesting it could take a long time to do so -- and not "blowing" economic growth by over-inflating the value of the pound or deflating demand, could require fine footwork.