Whose Boom? Clarke banks on purchasing power

The economy is the key front in the election battle and may now be starting to go the Government's way. No Chancellor for a generation has delivered such a favourable set of economic indicators in time for the campaign. In a series starting today, The Independent looks at how far the recovery will go

The Government can win the election if it fights it on the economy, according to Kenneth Clarke, Chancellor of the Exchequer. He might be right.

The sales figures published each week by the John Lewis department stores could turn out to be a better guide to Con-servative election prospects than the opinion polls. Some Tory voters prefer to keep quiet about their allegiance, biasing the polls, but there is no dis-guising the fact that consumers are spending more freely than at any time since the end of the Lawson boom.

The pace of the retail recovery during the next six months could make all the difference to the election result, assuming the Government holds on until May. For consumer confidence is one of two key influences on voting intentions, along with negative equity in housing, according to research by the City of London investment bank, Lehman Brothers.

According to the latest figures, the volume of high-street sales grew at the fastest rate since early 1989 in the year to August. Food sales have been virtually flat for the past 12 months. The boom areas are clothing and household goods.

Most economists think this happy state of affairs will continue for the next year or so. But, cautiously, they do not think the late 1990s will be a repeat of the late 1980s, when sales growth touched 8 per cent at the peak of the boom.

"It is being driven by fundamentals, not froth, this time," says Geoffrey Dicks, an economist at NatWest Markets. He predicts that consumer spending will grow by the same amount in 1996 and 1997 as it did in 1988 alone, making the Nineties boom only half the boom of the Eighties.

The fundamental influence is how fast consumers' purchasing power is improving. This depends on pay after inflation and taxes, which, thanks to April's income tax cuts, is now growing at nearly 4 per cent a year.

Falling unemployment is likely to take pay settlements a bit higher next year, while more income tax cuts announced in next month's Budget would provide another boost. But nobody expects anything dramatic - certainly not the 6 to 7 per cent real wage growth of a decade ago.

One reason many think this pre-election boom will be different is that much of last decade's froth was financed on tick. Borrowing rose sharply thanks to deregulation of the terms on which building societies could lend. Big mortgages and loans for consumer goodies backed by the security of borrowers' homes injected billions of pounds of extra spending into the economy.

It is just possible that there is a 1990s parallel to that financial deregulation. The rush by building societies and now the Norwich Union to join the stockmarket will put shares worth about pounds 18bn into the hands of borrowers and policy- holders next year. If it were all spent, that would add about 4 per cent to total consumer expenditure.

"There is a chance of faster spending growth," admits economist David Mackie from the investment bank JP Morgan. But he adds: "I think people still remember how badly these things can go wrong."

It puts the Government in a bit of a dilemma. The lessons of the past point to running a cautious economic policy now consumer spending is so clearly picking up. There is no case for even modest tax cuts putting more money into pay packets, and there probably is a need for an increase in interest rates. But a roaring consumer and housing boom is exactly what is required to boost the Tories' poll prospects.