Hamish McRae: My advice to the PM would be to go now

Go ASAP. In purely economic terms the timing of the election is a no-brainer. It is very hard to see any set of circumstances whereby economic conditions will improve over the next two years and a number of reasons why it might deteriorate.

That of course is no guide to the politics of it all: John Major won an election at the bottom of the early 1990s slump and then lost one when the country was one-third of the way into the subsequent long boom that has carried on to this day.

Nor does this "go now" suggestion carry dark forebodings of a UK economic disaster just round the corner. It is simply that the domestic economic pressures are mounting in both the private and public sectors and the risks to the economy, both national and global, will continue to rise for the next couple of years. The most obvious area of concern here is the present mounting credit squeeze. Forget about the Northern Rock debacle, spectacular though it is and will continue to be until its final fate is determined. That is a casualty of the squeeze – it is not the squeeze itself. What matters much more is the fact that all lenders are tightening up their terms, often under the cover of "responsible lending".

This is already evident at a personal level. Mortgages for all are becoming less readily available. Banks are cutting overdraft limits. Cash advances on credit cards and credit card limits are being trimmed. Potential mortgage borrowers who "self- certify" their incomes are finding several lending shutting their doors. The trend is less obvious but just as widespread at a corporate level, with companies finding the terms on which they can borrow being reviewed and several high-profile deals being put on hold until the funding is more clear.

This squeeze actually predates the Northern Rock affair. You can see that by looking at house prices in August, with falls in most areas, the sharpest being in London, and by looking at the trend in the numbers of home sales, down sharply, and in the level of personal savings, which had started to turn up. In many ways this is all very welcome. No society can operate for long with people borrowing more than they can afford. So in a sense it is better to restrict credit by prudential rules – for example, no mortgages for more than say four times income – than price. It may well be that the overall level of interest rates will be lower as a result.

It seems we are probably at the peak of this cycle now, whereas two or three months ago it seemed inevitable that rates would reach 6 per cent. But do not expect the credit squeeze to ease for several months, nor for there to be a rapid fall in rates. The money markets will be bumpy for the rest of this year, while inflationary pressures limit the scope for rate cuts.

That leads to the next pressure: inflation. There are three reasons to be concerned here. The immediate one is that global oil, commodity and food prices. All are at or close to record levels, driven up by world demand, including demand from Asia. It is hard to see these easing. Second, in recent years imports from China have served to depress the price of manufactured goods worldwide. But now even Chinese costs are rising and global goods prices are no longer falling.

And third, Britain has been helped by the strong pound, which cuts the cost of imports in sterling terms. But that too seems a little fragile, given that the current account deficit is now 3.5 per cent of GDP, as against 2 per cent three years ago and zero when Labour took over in 1997.

Parallel to this squeeze on personal and corporate borrowing is a mounting squeeze on public borrowing. There are two issues here: an immediate one and a medium-term one.

The immediate one is that public finances this year look increasingly glum. So far, to the end of August, government borrowing was running above last year's level, even though it was supposed under Gordon Brown's last budget, to be below. Things may improve and we are not yet half way through the financial year, but we ought not to have a budget deficit of nearly 3 per cent of GDP at this stage of the economic cycle, with the economy growing strongly and tax revenues reasonably strong.

True, France seems to be in an even worse position, but Germany is now in surplus and the US seems to have its budget under somewhat better control than it used to be. Five years ago, the UK had the strongest public finances among the large developed countries. That is no longer the case.

The medium-term problem is that we are about to start a long squeeze on public spending, under the so-called Comprehensive Spending Review, which should be out next month. This is supposed to look at spending for the next ten years and there is no doubt that it will mark a very different tone from from that of the past five. We have just had the fastest growth in public spending ever to take place in peacetime. That is Gordon Brown's legacy.

The thing now will be to nudge the various government departments to produce value for the money they have been given, for though spending will rise, probably by an average of about 2 per cent in real terms, this is about half the pace of recent years. Public sector pay, already under pressure, will be constrained and public sector employment, already falling, will probably fall even further.

All this will be contentious. It is not a recipe for harmony, even if economic growth is sustained. If growth were to falter, then pressures on everyone, individuals, companies and the government itself would rise sharply.

Perspective is important here. I happen to think that there will merely be some slowing of growth next year, perhaps from the present 3 per cent to about 2 per cent, rather than anything more serious.

There is quite a bit of gloom around the world, with US consumer confidence yesterday at a two-year low and German business confidence at an 18-month low – the former because of the US house price slump, the latter because of the impact of the strong euro on exports.

There may or may not be a fall in UK house prices similar to the US one. If there were, as we have been reminded by amongst others Dr Alan Greenspan, former head of the US Fed, then the long boom would surely fizzle to an end. But even a slowing of growth would ratchet up the pressure on people and politicians alike.

Maybe, were the economy to hit tougher times, people would want as Prime Minister a seasoned former Chancellor rather than an untried former public relations executive. Politics are different from economics. But the fundamental point surely stands that we are towards the end of a long period of fat years, while leaner ones loom ahead.