Spectre may return to haunt Brown

THIS column declared a year ago that economic forecasting was a mug's game - then promptly made forecasts for 2001. True to form, our strike rate has been patchy.

Out of seven predictions, three proved absolute stinkers: the dollar has not taken a tumble, unemployment has not returned above the one million level and the Treasury has made no more concessions of the type that followed the September 2000 fuel protests.

A further forecast proved only half-true: as predicted, the euro has come nowhere near recovering its $1.17 launch value, but European Central Bank president Wim Duisenberg has proved more robust than expected at fending off Franco-German political interference.

Two were bang on target: the 'new paradigm' internet economy is now mentioned only by comedians looking for an easy laugh, while our outlook for the Post Office - 'Private Mail will make Private Rail look like the Cannonball Express' - has an uncanny prescience about it, as 'Consignia' axes second deliveries, prior, no doubt, to axing deliveries of any description. Postal service privatisation is one of those 'reforms' wanted by nobody and dreamed up by Professor Brainestawm characters in the think-tanks.

Other winners from the same stable include the Poll Tax, the six-term school year and the Government's 'plans' for London Underground.

And the seventh prediction? Ah, well that was rather nebulous, as good forecasts always are: 'If 2000 began and ended on more strikingly different notes than any year in the past three decades, then tomorrow could see the start of a latter-day 1971.'

So, was 2001 essentially a transitional year, during which the economy moved from prosperous sunshine into a chillier climate?

Consider the evidence. Chancellor Gordon Brown's March Budget is already sepia-tinged with nostalgia. Along with the bulging surpluses was a promise of free money for all - remember the 'savings gateway' and the 'baby bond'?

The Chancellor blithely pledged to look seriously at committing the Treasury to sending large cheques to anyone starting a business, buying a house, going to college or having a child. By autumn, and Brown's Pre-Budget Report, the emphasis was rather different. Even assuming the Treasury's (very sunny) growth forecasts were met, lower tax receipts would add £25bn to public sector net borrowing between 2001-2002 and 2005-2006.

Not surprisingly, there was less talk of free money and a great deal more about the likely tax increases needed to fund the 'world class' public services that Labour had promised in its June election campaign.

A figure of 4p in the pound was touted, with the Institute for Fiscal Studies suggesting a worst-case outcome of 6p. These figures were treated by the Treasury with the sort of lofty disdain that is never quite a denial.

What seemed beyond doubt, however, was that the Treasury's long run of kicking into an open goal was over. The fat surpluses were vanishing, along with the buoyant growth, the rapid rate of job creation and the lack of heavyweight political opposition - Michael Howard may have little more to say than Michael Portillo, his predecessor as Tory Treasury spokesman, but he says it with a lot more verve.

Across town, the Bank of England also faced much tougher times than it was used to. Indeed, 2001 was the year the cult of the 'independent central bank' went into steep decline, which was not surprising as the cult was built on the notion that setting interest rates was easy provided the decision was not left to vote-hungry politicians. In 2001, the Bank cut rates seven times, from 6% to 4%. Nobody yet knows whether this was the right thing to do.

True, recessionary forces in the US are hammering our manufacturing exports, as is the strong pound. But outstanding consumer credit is a record £75bn, house prices remain sturdy and public sector pay rises are accelerating.

Key to this enormous monetary boost, of course, was the view that 'the risks are on the downside', and, in turn, key to this judgment were the presumed effects of the 11 September attacks.

Hardly had the world absorbed the events in the US than the idea gained ground in official circles that British consumer confidence would crumble unless it was bolstered by even heftier and cheaper credit.

Of this crumbling there was never much sign, and there were fears that the Bank's generosity had merely given the late-Nineties credit boom one last giddy lease of life.

Chancellors traditionally face a difficult fourth year in office - 1967/68, 1973/74, 1977/78 - in which those factors that have worked in their favour start to work against them. With 2000 having passed into history with only minor mishaps, it seemed at the start of 2001 that Brown had beaten the jinx.

By the end of the year, however, it appears more likely that, like everything else in the public sector these days, the jinx had merely been running a little late.