By Andrew Lilico. Follow Andrew on Twitter.
So here's the problem: the economy's picking up. That may not sound like a problem. That may sound like a long-hoped-for political gift. But it is – indeed it has the potential to destroy what remaining chance there is of David Cameron winning a May 2015 General Election. Let's see why.
There are distinct signs of life in the UK economy. It could have grown as much in the past two quarters as many economists predicted for the whole of 2013. Some monetary indicators are at their strongest levels since 2007, as we see below in this chart from Simon Ward of Henderson:
Sentiment isn't great, but it's consistent with where it's been during the past seven or eight months, and that implies growth, as we see here in this chart from the European Commission:
So – result! Crack open the champagne! Osborne vindicated! Cameron hailed! Get the #Victory2015 hashtag read! What's that? Is there a problem?
Well, obviously one problem could be that it all goes away if the Eurozone crisis blows up again, or a large UK bank fails, or the Chinese credit crunch worsens, or regionalisation of the war in Syria drives up oil prices. But that's obvious, and it's not the real problem.
The real problem comes if we do get the growth and it accelerates. The reason that's a problem is that it will probably lead to even higher inflation than we've seen these past few years, and no-one will blame anyone but George Osborne if there's high inflation.
There are two ways to think about the inflation rises story. One is that we've seen twice in recent years, in 2008 and again in 2011, that when the UK economy isn't actually contracting inflation goes to 5% and rising. If we were to get a sustained burst of 3% annual growth, how much inflation would we see then?
The second is that the period of the financial crisis has seen an enormous expansion in the monetary base that has not been matched by any vaguely equivalent expansion in the amount of broad money. Certain reasons why are well rehearsed – the banks went bust, capital requirements have risen. But the functioning of the monetary system has simply been impaired; it hasn't been fundamentally changed. If and when there is faster growth, that enormous increase in the monetary base will convert into significant pressure to boost the broad money supply and money GDP more generally. That pressure is likely to vastly exceed the ability of the real economy to keep up, and so will produce inflation.
I expect that if there is annual growth of 2% (which I think more likely than not to come soon), we should see inflation go above 5% within the following eighteen months. If there is annual growth of 3% (which I think plausible as something to be seen within two years) I now think CPI inflation will reach 8% within two years afterwards.
Well… two years afterwards already takes us beyond the next election, so we can forget that for now. But we can't ignore the possibility that if there is continued and accelerating growth over the next nine months, by May 2015 the inflation rate is likely to be rising quickly.
Rapidly rising inflation would be politically toxic for the government. But there could well be a window of opportunity between when the growth has really got going and when the inflation really gets going. There's certainly a chance that that works out nicely for Cameron and Osborne – that in May 2015 we are right in the sweet spot. But the odds are mildly (though only mildly) against that. Suppose that by May next year we've had consistent and accelerating growth, but the money supply numbers are looking ominous and the government doesn't think it can get to 2015 without inflation racing. What should it do?
In the old days, of course, it would not have been subject to random bad luck with regards to the timing of elections. There is no reason the government has to be assessed by the Electorate precisely at the moment it looks worst. The point of a five year term wasn't in Britain supposed to be that MPs had to serve for five years. The idea used to be that once they were in, they might not be keen to leave, so an election was forced automatically after five years. But now we have this Fixed Term Parliaments nonsense – an appalling constitutional change introduced to try to secure partisan advantage for the leaders of the Coalition, somehow voted through without noticeable complaint. Well, perhaps it seemed a nice idea at the time, but now's the time to be working out how to wriggle out of it.
I presume the way to wriggle out of it would be to time the introduction of some measure totally unacceptable to the Lib Dems, so as to force them to withdraw from the Coalition just as growth had bedded in and the opinion polls had turned, but before the inflation arrived. Then, once we were in a minority, we'd introduce some measure that would be totally unacceptable to Labour and the Lib Dems – and preferably to a half dozen Conservatives, also – that could be introduced in a confidence motion. Then declare that, sadly, just as everything was going right, the government couldn't continue, and we'll be forced by practicalities, Your Majesty, with your indulgence, to have a new General Election – obviously a terrible shame, but there you go.
As I say – the growth may stutter and stop; or the timing may work out very fortunate. But in the event it does not, a well-timed General Election could be just the ticket.