Gordon Brown: the new James Callaghan?

James Gleick's best-seller Chaos Theory was all the rage in investment circles in the late 1980s. The theory had its basis in meteorology and goes something like this: 'The flapping of a single butterfly's wing today produces a tiny change in the state of the atmosphere. Over a period of time, what the atmosphere actually does diverges from what it would have done. So, in a month's time, a tornado that would have devastated the Indonesian coast doesn't happen. Or maybe one that wasn't going to happen does.' The basic point is that an innocuous change in the initial conditions can drastically alter the eventual outcome. Today in investment circles this theory has a low profile but there are resonances in the political world.

In June 1992 a rag-tag alliance of fringe voters in Denmark set in motion a sequence of events that made the Conservative party here unelectable for a generation. Fifteen years on, the overzealous selling of mortgages to poor Americans is spawning a credit crunch that threatens to pull the rug under Gordon Brown's fledgling government.

When, against the odds, the Danish electorate rejected the Maastricht Treaty, it shattered assumptions of a smooth trouble-free glide path to European Monetary Union. The markets picked off one currency at a time, culminating in sterling's eviction from the ERM. The climactic event destroyed the Conservative party's reputation for economic competence. But from the ashes of the debacle came a monetary framework that provided the platform for 15 years of uninterrupted economic growth with low inflation - and the Labour party strolled to three general election victories on the trot.

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For the last 10 years politics in the UK has been extremely dull. We have seen falling turnouts, the domination of the agenda by pollsters, and an absence of real choice.

The low point was the 2005 election. The way both major parties formulated their policies made it likely that they would home in on similar answers. Each party had dependable core voters who could be ignored. It was the swing voters in marginal seats, the so-called 'Worcester Woman' or 'Mondeo Man', that were courted.

Since both parties were advised by marketing wonks from similar backgrounds using similar findings from focus groups, similar policies were advanced to appeal to these swing voters. In particular, the Conservative Party was advised against promoting tax cuts on the basis that it would put the electorate off. The result was a non-aggression pact between them on vital issues like the size of the state. But times are changing.

The Conservative Party conference in Blackpool and the Government's response in the pre-budget report suggest a political turning point.

Not so long ago Gordon Brown was riding high. The media and the electorate had become weary of Mr Blair's gimmickry, his Iraq adventure, and his status as President Bush's poodle. Mr Brown positioned himself as the antithesis of his predecessor.

Not surprisingly, the new Prime Minister enjoyed a surge in the polls and was entertaining the prospect of delivering a knock-out blow to the beleaguered David Cameron, particularly as the economic outlook for next year was deteriorating fast.

But the threat of an early election forced the Conservative Party to unite around some radical tax changes. Hitherto, 'tax cuts' has been a dirty word, because new Labour had skillfully linked it to cuts in public services. But the political landscape has changed. The penny is beginning to drop among the electorate that the huge increases in public spending have not delivered commensurate improvements in public services. People are still dying in NHS hospitals because they are filthy, while functional literacy rates have flat lined. This shift in sentiment was strongly confirmed by the Labour Party's internal polling. These showed the continuous tracking polls moving sharply towards the Conservatives in the hours after George Osborne's inheritance tax and stamp duty announcements.

The Labour Party's response to this challenge was panic. Alistair Darling's Pre-Budget report exposed the extent by which politics had taken over from economics at the Treasury. It was supposed to be the strategic cornerstone of the entire Brown era, the first comprehensive spending review since 1998. Instead, this mass of information was buried in a single, brief parliamentary statement and was overshadowed by the hurried half-baked plagiarism of Tory tax initiatives aired a week earlier. The reforms on inheritance tax and non-domicile status had not even been considered by the Treasury before then. Who needs an election if the Labour Party copies Tory policies within a week?

There are many reasons why governments are turned out of office - scandal, incompetence and plain bad luck are prominent among them. But few things are more certain to consign parties to opposition than a popular perception that they have run out of ideas. Tax policy is too important to be left to opportunist politicians with one eye on the polls. When this happens unintended consequences spring up all over the place.

The damage done by the Brown administration's loss of nerve is compounded by the Prime Minister's protestations that the postponement of an election was unconnected to the opinion polls. The electorate does not take kindly to being treated as fools. John Major's refusal to acknowledge that a U-turn had actually happened after sterling was evicted from the ERM meant the voters would never re-elect his government however well the economy subsequently performed.

Moreover, Gordon Brown may yet share the fate of another Prime Minister. James Callaghan's place in history turned out to be a footnote to Harold Wilson. He took over as Prime Minister in mid-term and had an opportunity to go to the country early, but chose to cling on to power to the very last minute. The economy deteriorated through the winter of discontent, and he was routed at the polls. Gordon Brown, too, is facing a deteriorating economic outlook. In the past few years economic activity has been underpinned by a booming housing market and financial services sector as well as large increases in public spending. A stimulus from any of these areas is unlikely next year. The outlook for 2009 is more problematic, but by then the Brown government may be a busted flush. It is possible that Gordon Brown's worst nightmare waits - being a footnote to Tony Blair. Politics is interesting once more.

By Brian Durrant of The Fleet Street Letter. Click here to find out more.