Evanomics

Thought on a new chancellor

• Evan Davis | Notes on Real Life |
• 28 Jun 07, 01:54 PM

It must be scary taking over from Gordon Brown. The new prime minister knows where all the bodies are buried in the Treasury building, and will clearly still have a huge interest in what goes on there. He has also taken a handful of influential Treasury officials with him.

So Alistair Darling's first management task is to oversee the Treasury itself, where most of the staff now have only known life under Gordon Brown.

On policy, the immediate task is to complete the comprehensive spending review to be published in autumn, setting out budgets for the next three years. Mr Brown has bequeathed to Mr Darling tight spending limits, which his replacement will obviously have to stick to. It's a more difficult spending round than any this government has had to face.

But most significant for the new chancellor is the fragile economic background - we're adapting from life with interest rates at four point something, to rates at five point something; or maybe six.

The last decade has been one of low interest rates, low saving (and high borrowing), high consumer spending and high asset prices. This has all seemed to hinge on the gift to the UK of global dis-inflation - as China and others have exported ever cheaper manufactured goods to us.

The problem is that the China effect hasn't been working in recent months, or at least not sufficiently for us to carry on with an economy getting a low interest rate boost from the Bank of England.

Hence, rates have gone up and slowly, the British consumer seems to be adjusting. Fixed rate mortgages taken out two or three years ago at 4%, are being renewed at 5.5%.

While things may go very well over the next three years, and while we may be able to adapt to the higher interest rates very smoothly (indeed, that's where most economic forecasts see us going in the years ahead) things may go wrong too.

So we've gone from what Mervyn King calls 'the nice decade' - which, to some extent, coincided with the Gordon Brown decade - to the possibility of a slightly less nice decade. It doesn't have to be horrible, but we don't know what it will hold. And there may not be very much Alistair Darling can do about it.

But there will be one big change in government to cope with the challenges of the next few years. Under Blair and Brown, the Treasury has operated as a semi-independent fiefdom, at times at odds with Number 10. No longer. With Alistair Darling and Gordon Brown, you 'll know who's in charge, and they'll both be facing in the same direction.

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