Clouds gather over house of prosperity

HARD though it may be for some of us to believe, nearly 20 years have passed since The Big Chill arrived on our cinema screens, a poignant tale of a group of middle-class Americans seeing their Sixties dreams shrivel in a harsh new economic and social climate.

So cumbersome, however, is the business of film-making that by the time the film was released, the worst of the new bleak climate was itself heading into history and the stage was set for the long boom of the Nineties - a boom that, admittedly, took rather longer to gather steam in Britain than in the United States.

Again and again, Britain's boom has seemed to falter. Again and again - like a juggernaut negotiating hairpin bends at 100mph - it has defied its critics and delighted its fans, remaining, against all the odds, firmly on the road.

The 1997 Asian crisis? A brief downward gear change. Ditto the Russian debt default in 1998. And so far 11 September appears to have caused no more than a brief dab on the brakes.

As with those round-bottomed children's toys, the British economy may wobble but it doesn't fall down. The result has been a balmy economic climate that may one day be tinged with the same golden-edged nostalgia as the Fifties and Sixties.

During Labour's first term, average household incomes rose 19% - quite a turnround from the misery of negative equity and unemployment with which the decade opened. That said, could 2002 see a new economic chill making itself felt in Middle Britain?

Perhaps. The economy has shown itself remarkably resilient to one-off crises. It may be a different story should crises drop the habit of forming orderly queues. And a number of factors are moving ominously into place, all of which threaten the agreeable way of life which, as the bumper Christmas sales figures and booming house prices have graphically demonstrated, millions of Britons now regard as their birthright.

The first cloud on the horizon is taxation. November's pre-Budget report saw the first shot fired in a campaign to persuade the public to pay more for public services, in the first instance the NHS and, if taxpayers are amenable, then education, police and transport.

The consensus among economists and City forecasters is that any move on this front is more than a year away. The Treasury will want firm evidence of global economic recovery before tapping the British taxpayer. Once the US and European-economies are out of the convalescent wing, and ordering British goods once more, it will be safe, even desirable, to drain spending power from consumers and transfer it to the public sector.

Even supposing this analysis to be correct - and if it is, it does not leave a lot of time for 'world class public services' to emerge before the next election - the near certainty of heftier tax payments of one sort or another, such as increased National Insurance contributions, from March 2003 will send an unwelcome draught through Middle Britain.

A second omen of a colder climate comes from the pensions industry. More and more employers are abandoning final salary schemes, those that guarantee a certain income in retirement. As a result, millions of workers are being warned that it is up to them to increase sharply their contributions to enjoy the benefits available to those older and luckier retirees on final salary schemes.

Typically, the National Association of Pension Funds warned last month, the everincreasing numbers excluded from final salary schemes need to quadruple their monthly contributions - from an average of 3% of pay to 12%.

Should this advice be heeded, a huge chunk of spending power will be taken out of the economy.

A third chill factor is, critically, interest rates. Low borrowing costs have proved the high-octane fuel that has kept the economy rolling along at top speed.

But during the past week or so, as the scale of the credit-induced spending binge has come to light, analysts' forecasts for the base rate have turned gloomy.

Before Christmas, the consensus had the base rate, at present 4%, rising gently to about 4.75% by the end of the year. Now, forecasts range from 5% to 5.5% - and above.

At these sorts of levels, more than £50 a month is cut out of household budgets on a £60,000 mortgage and nearly £100 on a £100,000 mortgage.

Taken together, bigger tax payments, mortgage payments and pension contributions seem certain to send the economic temperature in Middle Britain plunging by several degrees. The only question is - how cold will it get?

Trevor Williams, economist at Lloyds TSB, is optimistic. 'There will be some moderation, but as long as real wages improve and interest rates stay low, the effect will be muted,' he says.

Peter Spencer, of Birkbeck College, London, is less sanguine. 'The problems we may have expected last year are likely to surface now,' he argues. 'We are due for a reality check.'