8 NOVEMBER 2003, Page 15

In the trough of the Long Wave, the Tories must move on from panic to funk

ew economists have been martyred for their theories — more, perhaps, should be — but Nikolai Kondratieff fell foul of Stalin, was sent to Siberia and shot. Michael Howard should raise a monument to him. Until then his memorial will be his Long Wave Theory: the belief that nations' economies are governed by cycles which last for half a century or longer, and that these build up and then break, like waves rolling in to the shore. This pattern is certainly consistent with the four phases of the stock market — confidence, enthusiasm, panic, and then funk, as our City and Finance issue specified — but it must have been hard to square with Marxist dialectic. Poor Kondratieff. If he had only tried out his theory on the Conservative party, he might have lived to an honoured old age. It fits rather nicely. Here, after all, is or was the most successful and durable of all political parties, but at long intervals in its long history it comes crashing down like a breaker. Wave-crests built up under Margaret Thatcher and Lord Salisbury, but their party took 18 years to get back into power after Balfour lost it, longer than that after Peel, and after Major? The theory remains under test, which is as much as Mr Howard can expect. He has seen his party go from confidence to enthusiasm to panic and through the false dawns and deceptive rallies of a bear market, and the best he can hope is to have got as far as funk. He may be consoled to reflect that Kondratieffs wave looks better from the trough than it did from the crest, when it was breaking.

Come like shadows

One claim Michael Howard can already make: he has survived as shadow to Gordon Brown as Chancellor, and even prospered. This is more than can be said of his four predecessors. One after another, they left the field, or were carried away from it, or were outpointed, or offered no contest. At first his opponents blithely assumed that they need not struggle too hard or too long, because the new boy would make a mess of things. After all, that was what Labour chancellors did. They got off to a confident start until some crisis overwhelmed them, and then it would be all hands to the pumps and emergency measures and improvised budgets, blame for the speculators and rescues from the IMF. This Chancellor knew that, after sterling's collapse on Black Wednesday, crises like these were no longer a Labour monopoly. He had been given his chance to catch the Tories bathing and run off with their clothes. They let him.

Cover from Prudence

Prudence came in on Gordon's arm and gave him cover. This was to be a Labour government which paraded its fiscal and financial rectitude. Why, his very first act was to restore the Bank of England's independence. Not until his third year in office did he open the sluice-gates and let public spending flood out, and only now is the damage becoming apparent. Next year's budget will strain his ingenuity and put his facility for double-counting at a premium, and we shall see, too, of what substance his shadow is made. This one, the sixth of them, has work to do. He needs an accountant's mind and an analyst's eye to measure the hole in our pension funds left by this Chancellor's airy and early decision to tax them. He must look behind the scenes of the budget arithmetic, to the huge liabilities left off the national balance sheet. Network Rail, which in its own right could not borrow a bus fare, finances itself on the Treasury's unwritten guarantee. Prisons and hospitals achieve this through the Private Finance Initiative. Directors of companies sometimes believe that out of sight is out of mind and that such liabilities need cost them nothing. When things go wrong they find out their mistake, as did Enron.

Bung for a baby

One question cries out to be asked and, for preference, answered: how much time and effort and money are now being spent on shunting other lumps of money round and round? The first of this Chancellor's favourite credits (labelled 'working families') used the PAYE system to extend employers' unpaid tasks from tax-gathering to tax-recycling — but now a wilderness of credits has spread as far as babysitting and will soon feature a £250 bung for being born. By applying both his brains, David Willetts has made himself one of the few people (and fewer Conservatives) who understands them. In the congestion charge imposed on London by Mayor Livingstone, we now have a tax which costs more to collect than it yields in revenue, but what do the Taxmaster-General's credits and bungs and Christmas bonuses cost to administer? Ile is spending more to achieve less, and this may yet prove to be the joint in his armour.

Pay more, get nothing

Traditional chancellors joust with Whitehall's big spenders. This Chancellor's instincts for detail, control and complexity have encouraged him to mind other people's business across Whitehall and far beyond, and have turned the Treasury itself into the father of all spending departments. In his reign, public spending will soon have risen by 50 per cent, but without any proportionate increase in value. The telltale figure (it can be found in the storehouse of the Office of National Statistics) measures the inflation rate in the public sector. From a standing start when he took over, it has now worked its way up until £6.40 in every £100 of his revenues goes up the chimney as inflationary smoke. Paying more tax for better public services was always a dubious prospectus, but paying more for nothing is an outright loser — or, of course, for the Chancellor's shadow, a winner.

Reading the charts

One mistake, at least, Michael Howard and his successor as shadow chancellor will not be tempted to make. They cannot rely on Kondratieffs wave to wash them back into office. Chartists believe that patterns like these can be discerned in markets, because they show recurrent responses to recurrent sequences of events. This tallies with my own belief that finance is a specialised branch of human nature — but that free will and free choice must always have the last word. It occurs to me that the new team ought to find this encouraging.