Commentary: Re-run of Nineties horror story

The Chancellor at the time Norman, now Lord, Lamont found that the flow of money into the Treasury began to fall short of expectations just at the time when he was under pressure to increase government spending to alleviate the pain of the slowdown. He learned the hard way about the law of large numbers.

Government income is huge and government spending is huge but when both are in balance most people are unaware of the sums involved and happily ignore them. But once they tip out of balance, the gap between the two, and therefore the amount that has to be found by borrowing or tax increases, very quickly becomes vast.

Alistair Darling is heading for the same horror story and used today's speech at the Labour Party conference to deliver a barely coded warning that bad times lie just around the corner. Politicians and civil servants are as guilty as the rest of us in assuming that the good times will last for ever and they are always surprised at how rapidly things deteriorate when things do start to go wrong.

Presumably someone in Whitehall has been checking the Government's bank statements, in early preparation for the pre-Budget report on the nation's finances which is due in November. It is a fair assumption that they were shocked by what they saw.

In fact the signs are evident to all. Independent think tank the Institute for Fiscal Studies monitored spending in the five months since the Budget and found government borrowing to be 70 per cent higher than last year, rather than the 19 per cent predicted in March. If things continue at this rate the Government will need to borrow £65 billion this year, which is 4.4 per cent of GDP and makes a mockery of earlier guidelines. In fact it may be worse, if not this year then certainly next when the slowdown is expected to be more marked.

There is no secret as to why. In a slowdown income tax receipts disappoint because people don't get pay increases, some lose their jobs and bonuses dry up. Companies earn less profit and pay less tax, a particularly acute problem here where so much tax in recent years has been paid by banks. The stock market is depressed so there are fewer capital gains to tax, the housing market is flat meaning less stamp duty, consumer spending is slow so there is less VAT.

On the spending side, a rise in joblessness increases the demand for unemployment pay, a rise in mortgage rates increases social payments to try to keep a lid on homelessness and repossessions. Gloomier economic conditions lead to more depression and sick pay. Add to that the impact of inflation, which is almost always adverse.

Lord Lamont found all those years ago that nothing goes right. Borrowing so much money pushes up interest rates and makes the economic problems worse. Tax increases cause fury because people are already short of money, and again slows the economy down even more. So the only thing a Chancellor can do is try to cut government spending - on health, on education, on everything Labour holds dear.

The Chancellor stopped short of spelling that out to the Labour party faithful today. But if the economic slowdown does get worse they will know soon enough.