Stephen King: Brown haunted by the ghosts of Chancellors past

Clunk, clunk, clunk. It's December, advent calendars are being opened and the ghost of Jacob Marley is paying a visit to Gordon Brown. Unlike his haunting of Mr Scrooge – the model of austerity – Mr Marley's visit to the Chancellor of the Exchequer is driven by Mr Brown's sudden profligacy. Mr Marley is worried. What happened to the prudent Chancellor? Why has he suddenly raided his piggy bank? How has he managed to be so generous with his Christmas presents?

Mr Marley takes Mr Brown to see the ghost of Chancellors past. It's the late 1980s and Mr Marley and the current Chancellor are standing, unseen, in 11 Downing Street. Nigel Lawson is hunched over his papers, putting the finishing touches to his Budget speech. He makes one calculation after another, trying to work out how he is going to fund his tax-cutting plans. It's now 1988. There have been a few good years. The housing market is looking a bit on the strong side but, other than that, it's been plain sailing.

Carefully, Mr Lawson pencils in some GDP growth assumptions. He doesn't want to do anything too clever: after all, his luck may eventually run out. So, he bases his medium-term fiscal projections on some relatively cautious numbers: 2 per cent growth in 1989, the same in 1990 and the same again in 1991. Surely, he thinks, no one can complain too much about these numbers? After all, they're quite a bit lower than the growth rates achieved in the second half of the 1980s.

Mr Marley looks at Mr Brown with a wry smile on his face. Gathering up his chains, he takes the Chancellor forward in time to meet the ghost of Chancellors (almost) present. It's 1998 and it's Budget day. Mr Brown looks down on himself at the dispatch box. At first, he looks at his own performance with some satisfaction. Here is a confident man, fully in control of the country's economic destiny.

As the words come out, however, the present day Chancellor begins to feel a little uncomfortable. "The five-year deficit reduction plan ... is not only on track, but is being achieved more quickly than expected.... Previous governments have made the mistake, most recently in the late 1980s, of claiming that they had solved our deficit problem when all they had was a short-term surplus.... We are determined to avoid such mistakes. To balance the Budget for one or two years and then let it run out of control in the years that follow is simply to fail those who depend on public services being sustained year in, year out."

Mr Marley takes the Chancellor by the hand back to the present day. They're in Mr Brown's offices in the Treasury. Pointing to the papers on Mr Brown's desk, Mr Marley rattles his chains. The ghost clearly wants Mr Brown to take another look at his pre-Budget report, which lies open on the table. Mr Brown glances down. Staring back at him is table B3, a seemingly innocuous little table. Mr Brown knows these numbers very well. They're the GDP growth assumptions upon which he has based his fiscal plans: 2.75 per cent next year, 3 per cent in 2004, another 2.75 per cent in 2005.

Mr Brown sits down in a state of shock. He, the prudent Chancellor, is using even more optimistic growth assumptions than Mr Lawson, the author of the greatest "boom-bust" chapter in recent economic history. What's more, even on these growth assumptions, the Chancellor is still presiding over a budget deficit of £24bn by 2004, almost double his expectation of just a few months earlier. A knowing look passes over Mr Marley's face.

Mr Brown begins to feel uneasy again. He wants to be generous. Tiny Tim and his friends in the hospital seem to be a deserving case. But he can't please everyone. Bob Cratchit, the fireman, is hoping for a decent Christmas bonus but the Chancellor knows that he simply will not be able to pay up. Some people are going to have a less than festive Yuletide.

Mr Marley draws up his chains. Time to move on again. Off to see the ghost of Chancellors future. Back to the Commons, where a greying Mr Brown is explaining how it all went wrong. Mr Marley then takes the present-day Chancellor down a London street. Houses are for sale. Many of them are boarded up. Looking in an estate agent's window, he sees "repossession" written everywhere. Yes, the housing market has popped and, with it, consumer spending has hit the buffers. The only good news is that the Bank of England's prompt action to cut interest rates aggressively has prevented the UK economy from entering recession.

The absence of recession, however, has not helped the Chancellor's cause. Output may have risen, but with gains of only about 2 per cent per year, the impact on tax revenues has been rather unpleasant. Today's Mr Brown does a quick calculation in his head. He realises that, with this rate of growth, he will end up with a budget deficit shooting through 4 per cent of GDP. This is hardly the stuff of prudence.

A newspaper blows past in the wind. Mr Brown grabs it. It's the day after the 2005 Budget. "Ebenezer Brown" says the headline. The Chancellor scans the main story. Tax increases required to plug the deficit. Spending plans slashed. Manifesto pledges not met. And, for the final indignity, the European Commission telling the UK that it has failed to meet the Maastricht convergence criteria.

Mr Marley grabs Mr Brown by the hand one last time and takes him back to present day 11 Downing Street. The Chancellor climbs back into his bed. The next morning, Mr Brown wakes up. Was it a dream? Was there a ghost? Did he go back to the 1980s? Did he really see into the future?

Mr Brown is a rational man and dismisses the night's experience as no more than a particularly unpleasant nightmare. His equilibrium, however, has been rocked. He knows he is taking a gamble. His growth numbers are purposefully optimistic – without them, he would not be able to offer the same level of commitment to public services. He's assuming a rapid rate of productivity growth, adopting a similar model to Mr Lawson in the second half of the 1980s. And, even with these optimistic numbers, he still ends up with a big budget deficit.

Gritting his teeth, he runs through the corridor to number 10. Walking past the private secretaries, he goes straight into the Prime Minister's office. "Tony", he says, "I have to come clean. There's no other option. We're going to have to raise income tax." The Prime Minister frowns. Overcome with the magnitude of his decision, the Iron Chancellor slumps down in a chair, suffering from a severe case of metal fatigue.

Stephen King is managing director of economics at HSBC.

stephen.king@hsbcib.com