You can't fool us with your short-term policies: Leading article

We are working more, earning more, shopping more and producing more - at least most of us are. The Independent's week long look at the real world hiding behind the government statistics has revealed an economy which is steadily growing. That's a pretty good verdict for Chancellor Clarke, given the country's historic ability to swing quickly between booms and busts rarely pausing for breath in between, and surely bodes well for the Conservative's electoral prospects.

But. There is always a "but" when talking about the economy, and in this case there are several. Whether it be imminent mistakes we may be about to make, long-term underlying problems that we have failed to solve, or future economic demands we have failed to anticipate, the chances of Britain sustaining a steady expansion that benefits all the population are limited. Moreover, voters are more sensitive these days to the fact that there are often long-term risks hidden behind short-term good news.

Growth may not be enough for the Conservatives this time round.

For the moment, the British economy is looking good. Unemployment is falling, consumer spending is rising - but not too fast. All well and good. The Chancellor and the Governor of the Bank of England have battled it out all year over the best level of interest rates to keep things ticking over, and rates seem broadly to be in the right place.

It's always a sticky judgement call, choosing interest rates. Keep them too low so that we borrow and spend with alacrity, and we will start to demand goods faster than we are able to produce them. Result: inflation takes off. But push interest rates up too high, and homeowners can't make their mortgage payments, businesses won't borrow to invest, and we all tumble into recession.

The big question now is whether Mr Clarke can continue to get his interest rate judgements right in the six months to go before the election. Consumer spending and consumer credit (the amount shoppers spend and borrow) are already starting to pick up at a rather troubling rate. What with building societies turning into banks and throwing cash at their customers, and Conservative MPs clamouring for tax cuts to line voters' pockets, consumers could have even more money to spend within the next year. To stop that cash boom turning into an inflationary boom, sooner or later interest rates will have to go up.

Pushing up mortgage rates just before an election, however, is not an easy thing for a politician to do. Any chancellor would be tempted to delay a few months, especially when the mistake won't be realised until well after the election.

He would be encouraged by those Siren voices who sing that inflation is dead anyway, so there is nothing to worry about. If only. Sadly, we have heard this tune too many times before. Every so many years politicians and economists pronounce that the British boom-bust disease has been cured. An economic miracle, was how Margaret Thatcher and Nigel Lawson hailed their own spurt of growth in the Eighties. And, funnily enough, it turned out to be an inflationary boom just like all the others.

Admittedly, it may be true that greater flexibility in employment these days has reduced inflationary pressures. If we think our jobs are at risk, or that our company can easily fire us, we are rather less adamant in our demands for pay rises.

Even so, those workers who decide their own pay rises - notably chief executives and MPs - have all been awarding themselves mammoth increases in recent months. How long will it be before pay in other areas follows suit?

Wherever there are skills shortages, wages will go up for workers with the right qualifications, as companies compete to recruit them. By failing to invest enough in skills and education at a time when human capital is becoming more and more important, we have created two distinct labour markets. In one, the skilled workers do well, and are poised to pick up rewards as the economy grows. In the other, the unskilled workers endure the flexibility of low-paid temporary work, and spells on the dole.

"Whose boom?" was an apt title for our series this week, for those without qualifications are unlikely to share much in the benefits of the boom at all, no matter how big or small it proves to be.

Inadequate investment in education is bad for social cohesion, bad for our future economy and bad for inflation too. If firms cannot recruit the new skilled staff they need, they won't be able to keep up with rising demand. Similarly, if they do not invest in new plant and machinery, they will lack the capacity they need to expand. Sadly, investment in Britain has not picked up well at all during the four years of recovery.

Kenneth Clarke has done well to keep the overall progress of the economy relatively steady in the past few years. But government, business and individuals need to work together to boost our productive capacity if the good work so far is not to be wasted.

Of course, all this doom and gloom about the risks of the future is unlikely to trouble too many Conservative MPs today. In the next six months they are counting on short-term economic growth, pay increases, tax cuts and rising standards of living to give voters good cheer. The chances are that they will get it - at least for the swing voters that count.

But this time economic growth and rising living standards in the short term may not be enough. Voters judge governments on the standards they set themselves. The complete collapse of the Eighties boom, the ERM debacle, and the unpromised tax increases will all have persuaded voters that the short term does not last.