WHEN Alistair Darling was given the job of chancellor in June, he probably did not expect to be setting the scene for a general election just a few weeks later.

It may be that he will be spared this task, and that Tuesday’s double bill of the comprehensive spending review and prebudget report will be a stand-alone announcement, if Gordon Brown decides the polls are too close to risk going to the country.

But Darling is in the spotlight, and under pressure as a result of some eyecatching tax announcements by George Osborne, his Conservative shadow, last week. Having criticised the Tories before, let me congratulate them now.

Raising the inheritance-tax threshold to £1m may not mean much in Wigan or Walsall but it means quite a lot to southern voters, who are in any case most resistant to Brown’s charms. As chancellor, he was blissfully unaware of the anger about inheritance tax.

Likewise, exempting first-time buyers from stamp duty responded to the anger among young people that the rise in house prices squeezed them out of home ownership and the government did nothing about it.

The political masterstroke, though, was paying for all this by a £25,000 annual levy on “nondoms”, people who live in Britain but are nondomiciled for tax purposes. Two popular tax cuts, in other words, paid for by a popular tax increase. There has been smouldering resentment about the fact that Brown promised to do something about nondoms but did not.

Do the Tory numbers add up? An exchange of letters between Osborne’s office and the Treasury permanent secretary has left us in the position that Whitehall cannot say with certainty they do not. Raising £3.5 billion in a painless way is testing but it appears that, years after promising to tackle the nondom anomaly, the Treasury has not done enough work on it. That may mean the nondom levy could not be a policy for a government, at least not straightaway. It was, however, a great piece of opposition politics.

How will Darling respond? This is where you have to feel a bit sorry for him. With the public finances veering towards another overshoot, he has no preelection cash to spread around, though he will make a series of “green” tax announcements and make detailed proposals on the tax treatment of private equity, to be put out for consultation.

He has already hinted at a downward revision of the government’s 2.5% to 3% growth forecast for next year, which on the face of it is not the ideal backdrop to an election, though this will be more of a downward nudge than a slash.

This is obviously an important component in Brown’s decision on election timing. How nasty is the economy going to get?

We are seeing several forces impacting on it. There are the five increases in interest rates by the Bank of England since August last year; there is the additional impact of the tightening of credit conditions arising from the crisis in debt markets; and there is the government’s comprehensive spending review, which will be sold as directing billions more of taxpayers’ largesse towards education and the NHS, but which will mark a sharp slowdown in real spending growth from roughly 4% a year over the past eight years to 2% for the next three.

Expect a big emphasis from Darling on efficiency savings and “sound public finances”, which he will contrast with what he will claim are unfunded Tory commitments. Prudence, it appears, is making a comeback, after taking a holiday in Brown’s latter days at the Treasury.

What will be the net effect of all this? The credit crisis and past rate hikes will take the edge off the global economy, though only to the extent that its recent supercharged growth rate of 5%-plus reverts to something like a more normal 4%.

There will also be a direct effect on the UK. When I argued a few months ago the Bank did not need to raise rates beyond 5.5%, it was in anticipation of the slowdown in consumer spending and the housing market we are seeing.

There is now clear evidence in a drop in mortgage approvals to 109,000 in August and weaker survey numbers for retail sales. The Halifax reported a 0.6% drop in house prices last month, consistent with a slowing market. Consumer confidence actually recovered, according to the Nationwide, though its readings were taken before Northern Rock dominated news bulletins.

A slowdown in consumer spending and the housing market is long overdue and is occurring. It will be reinforced by what Andy Hornby, chief executive of HBOS, described as a “fundamental shift” in the mortgage market, as lenders seek to restore margins and take a tougher attitude towards risk.

How slow could growth be? The gloomiest forecast you will find is from Peter Warburton’s Economic Perspectives, which predicts a 0.3% decline in gross domestic product next year. That is an outlier but there are now quite a few forecasts starting with a one, including the Centre for Economics and Business Research, 1.4%, and Lehman Brothers, 1.7%. The consensus is roughly 2%.

Does this argue for a quick poll, an economic “cut and run”? John Major famously won in April 1992 at the tail-end of the longest recession in the postwar period. Labour, despite recent poll oscillations, may take comfort from the belief that in times of uncertainty, voters stick with what they know, as in Hilaire Belloc’s “Always keep a hold of Nurse/For fear of finding something worse”.

Against this, voters also punish governments for past errors. That was one reason why the Tories lost in 1997; the legacy of sterling’s Black Wednesday exit from the European exchange-rate mechanism and big tax hikes. Harold Wilson lost in 1970 as punishment for the 1967 “pound in your pocket” devaluation.

Despite higher taxes, the raid on pension funds, mismanagement of tax credits, the wasteful splurge in public spending and the rest, Labour under Tony Blair was not seen by voters as having done enough to deserve serious punishment, though its majority was eroded. Lower interest rates were an antidote to higher taxes.

So the real economic gamble for Brown is not the extent of next year’s downturn. It is whether, if he hangs around too long, his past crimes will catch up with him.

PS If not now, when? Nobody was surprised when the Bank of England’s monetary policy committee (MPC) left interest rates on hold on Thursday. Many are looking to November, an inflation-report month, with the next meeting on November 7-8. That could mean, depending on Brown’s poll announcement, a postelection rate cut. If the election was on November 8, even an independent Bank would find it hard to announce a reduction in the cost of borrowing. It may be, however, that people have got ahead of themselves. The MPC has shifted ground since August, when its inflation report pointed to the need for one more hike in Bank rate to 6%. Whether it has shifted enough for a cut yet is more questionable.

There is another argument for caution. A few months ago, when criticism rained down on the Bank because Mervyn King had to write his open letter to the chancellor explaining inflation’s rise above 3%, it stiffened the MPC’s resolve. Two subsequent rate hikes came sooner than they might have done, and the Bank’s language got tougher.

Now the Bank is licking its wounds from the Northern Rock/ money-market crisis, when it was criticised even more, including a front cover of The Economist (UK edition only), adorned with a picture of King and the headline “The Bank that failed”. Even so, the MPC may see moving early on rates as another risk to credibility, a sign it is bending too easily with the wind. In which case, we may have to wait longer.

david.smith@sunday-times.co.uk

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