FROM the chancellor's brandishing of the red Gladstone box to his speech in the House of Commons, British budgets are events in their own right. But as the drama of the day fades, some turn out to be less about the public finances and more about politics. Alistair Darling's budget on March 24th was first and last a launching-pad for Labour in the general election expected on May 6th.

As Britain prepares to go to the polls, its sick economy is uppermost in voters' minds. With good reason. There are fundamental doubts that it can ever recover fully from a banking crisis and recession that laid Britain lower than many other rich countries. In the short term, the worry is whether a feeble recovery reliant on fiscal and monetary life-support can develop its own driving force. Looking ahead, there are fears that the strong, steady growth rate in the 15 years before the financial crisis is no longer Britain's default mode. And casting a dark shadow over the next parliament are public finances that have veered wildly into deficit and will need to be hauled back harshly from the brink.

Mr Darling sought to soothe. A recovery was under way, but its fragility called for careful nursing, which ruled out an early attack on the deficit this year. To reassure financial markets jittering over the prodigious size of government borrowing, the chancellor showed restraint. He did not dispense altogether with traditional pre-election sweeteners. Mr Darling announced some temporary help for most first-time homebuyers, which will relieve them of stamp duty, a property-purchase tax, and extended some extra payments to pensioners. He also said he would phase in slowly a planned increase in fuel duty. But the overall giveaway will cost a modest £1.4 billion ($2.1 billion) in 2010-11.

From boom to bust to blight

Mr Darling aimed above all to draw a dividing line between experienced Labour and the neophyte Tories over the central issue of this election: who can be trusted most to steer the economy and restore sound public finances. But Labour's credibility is not what it was. In the past two elections Gordon Brown could and did crow about how well the economy was doing in both historical and international terms. As chancellor he claimed not only to have done away with “boom and bust”, but also to have presided over the longest period of sustained growth since 1701. But as prime minister he has broken all the wrong records.

The economy shrank by 5% last year, the biggest fall since the Great Depression. The contraction over the six quarters of the recession was 6.2%. That peak-to-trough decline was less severe than in Japan, Germany and Italy, but the recession lasted longer than in any other G7 economy.

The public finances look even worse. Not only is the budget deficit the highest, as a proportion of GDP, since the second world war, but this year's will be the biggest of any G7 (and even G20) economy, according to the IMF. The build-up in government debt between 2007 and 2014 will be second only to Japan's (see chart 1).

A recovery of sorts began in the fourth quarter of 2009, when GDP grew by 0.3% from its trough in the previous three months. But even this flicker of life may prove to have been snuffed out in the first quarter of this year. Consumers may well have been discouraged when the main rate of VAT, a consumption tax, was restored to 17.5% at the start of 2010 after 13 months at 15% to counter the downturn. Recent disappointing export performance has dimmed hopes that Britain can trade its way out of the quagmire.

As one reverse has followed another, Britain's economic reputation has nosedived. So has sterling. Its trade-weighted value has fallen by around a quarter since mid-2007, a bigger decline even than after the pound was turfed out of the European exchange-rate mechanism in 1992. For some, Britain now vies with the distressed likes of Greece and Spain for the title of sick man of Europe. Others see disquieting parallels with the 1970s, when Britain's economy certainly deserved that tag. As then, the pound is wobbly, strikes are breaking out again, the public finances are shot to pieces and the election may result in a hung parliament. This has happened only once since the second world war, in February 1974.

There is also more than a passing resemblance to Japan, which never regained its economic stride after its banking crisis of the 1990s. Could Britain now follow suit, given that its financial system came so close to collapse in October 2008? Those inclined to think so find worrying confirmation in a report by McKinsey, a management consultancy, which shows that total indebtedness in the British economy was the highest as a share of GDP among ten advanced countries in 2008, narrowly beating Japan's.

The central charge is that the bloom of economic health in the period of non-stop growth after the recession of the early 1990s turned into the flush of debt intoxication. As the expansion went on, it came to rely too much on consumer and public spending. Current-account deficits were persistent. Now Britain must pay for its sins through a long period in rehab that will make any recovery a pale simulacrum of the real thing.

History unrepeated

There is something in this, but less than the fretters claim. The economy may have been lopsided before the recession, but on nothing like the scale of southern Europe. In 2007 Spain's current-account deficit ran at 10% of GDP; Greece ran one of 14.4%. By comparison, Britain's 2.7% was a mere bagatelle. The fall in the pound has allowed the economy to regain competitiveness in a way not open to the weaker members of the euro area.

As for the resemblances with the 1970s, history is not repeating itself. Inflation has recently flared up, but at 3% in February it is tame; the post-war high, reached in 1975, was 27%. And despite the current industrial unrest, the private-sector unions are no longer the behemoths that Margaret Thatcher squashed in the 1980s.

Of all the unflattering comparisons, the one with Japan is the most salient. There are indeed reasons to expect a financial crisis to scar growth. But Britain is not as deep a debtor as that headline figure from McKinsey suggests. That number is inflated by London's role as a global financial hub where foreign banks cluster to do international business. Adjusting for this, McKinsey reckoned that debt amounted to 380% of GDP in 2008. Although this was the second-highest after Japan (459%), four other countries—Spain, South Korea, Switzerland and France—had debt above 300%. In any case, the consultancy cautioned that total debt was a “crude metric”, insufficient to gauge where the real trouble spots are, which in Britain are in borrowing incurred by households and in commercial property.

Even if lamentations about the British economy are overdone, there is no miraculous way out of the mess. The Treasury's projection of 1.25% growth this year seems reasonable. But its prediction that this hesitant trot will break into a gallop of 3.25% in 2011 looks over-optimistic. True, the IMF is forecasting 2.7% (see chart 2). But the latest survey of independent forecasts assembled by the Treasury found that they were expecting, on average, growth of 2% next year.

The recovery is being helped by extraordinarily loose monetary settings. The Bank of England has held the base rate at 0.5% since March 2009 and has injected £200 billion into the economy by purchasing assets with central-bank money. A temporary boost will come as companies stop the fierce destocking that exacerbated the recession. But if the recovery is to take root, it must be able to cope with a gradual withdrawal of emergency monetary support and develop a more sustained impetus from the private sector than a turnaround in the inventory cycle.

That will require new sources of demand. The long expansion was sustained by buoyant private consumption and public spending. Although the pace of consumer spending slackened in the middle of the 2000s, that was against a background of remarkably low real income growth, which meant that consumers had to resort to extra borrowing. As a result the household saving ratio slid from 9.6% of disposable income in 1997 to a 50-year low of 1.5% in 2008. Meanwhile, net trade—exports less imports—kept on detracting from GDP growth.

Trade to the fore

Now the economy must be driven by net trade, with private investment pitching in as well. In principle, the fall in the pound has set the stage for this. However, dire figures for exports in January (a fall of 4.4% compared with December) aroused fears that the hoped-for boom in exports will be stillborn. Sceptics say that exporters have not capitalised on the falling pound by cutting their foreign prices.

But exports have at least climbed off their lows of last spring, and adjustment to currency moves takes time. For example, it was not until 1994 that export growth really started to boost the economy after the post-ERM devaluation. The coldest winter in 30 years may have affected January's trade numbers; business surveys are now reporting a big upturn in export orders. That would make sense, since exports are now much more profitable, which should encourage firms to expand overseas.

An associated worry is that Britain has become too reliant on finance. Perhaps manufacturing, which still accounts for around half of all exports, has shrunk to the point where it cannot take advantage of a cheaper pound. But this exaggerates the significance of the financial sector, which even at its peak made up only around 8% of the economy compared with manufacturing's 12%. Britain remains the sixth-biggest manufacturer in the world. And, after a decade of grappling with a high exchange rate (before sterling started to tumble in 2007), industrial firms have become leaner and fitter.

A recovery in private capital spending should also get under way, not least after the extraordinarily sharp falls that occurred during the recession, with business investment contracting by 19% last year and housing investment shrinking at around the same rate. There is an urgent need to re-equip the country with new plant, especially to generate power.

But even if the recovery does become entrenched, it is likely to be lacklustre both this year and next. Britain's banks are still trying to mend their battered balance-sheets, which will constrain the supply of credit. This is more of a problem for smaller firms than big companies, which have access to bond and equity markets, but it will act as a brake.

From fool's gold to austerity

The recovery will also be cheerless. The recession, oddly enough, has felt less painful than the steep falls in GDP might have suggested: partly because unemployment has not risen as much as feared, and partly because many households have been shielded by lower interest rates on their borrowing costs. But now the payback comes. Whatever the extent of the country's total debt, British households are certainly the most indebted (relative to disposable income) in the G7. That alone will hamper their ability to spend freely in the years ahead, as the base rate moves up from its current emergency setting of 0.5% and mortgages become more expensive.

As Andrew Haldane, executive director of financial stability at the Bank of England, has pointed out, debt operates like a tax, with higher servicing charges on it reducing disposable income. Making matters worse, an actual tax squeeze is on its way. Labour is planning to raise national-insurance contributions by a percentage point from next year, but that will not be enough. More tax increases will probably be needed.

A feel-bad recovery is better than none at all. But just how fast can the economy expand after the traumas of the past three years?

At the trough of the recession, in the third quarter of 2009, GDP was more than 6% lower than in the first quarter of 2008. If the underlying growth rate of productive capacity had remained the same, this would imply that the economy was operating around 10% below its potential output. With so many spare resources available, the recovery could sprint ahead for several years without inflation taking off.

But financial crises damage the capacity of an economy and can also affect its subsequent growth rate. In a study based on crises in the past 40 years, mainly in emerging economies, Michael Dicks, an economist at Barclays Wealth, has estimated that as much as 7.5% of Britain's potential output has been lost. And he thinks that the sustainable growth rate has fallen to 1.75% a year.

The Treasury thinks Britain will get off more lightly. It has lopped 5% off potential output, but has not changed its view that subsequent trend growth will remain at 2.75%. That is probably too optimistic. The National Institute of Economic and Social Research, a think-tank, reckons that the trend rate is now 2.4%. Bart van Ark, an economist at the Conference Board in America, thinks it could be as low as 2%.

One reason to think that the damage to the economy has been contained is that the labour market has soured less than feared. The fall in output during the downturn has been much worse than in the early 1990s, when GDP sank by 2.5%, but the increase in the jobless rate since early 2008, from 5.2% to 7.8%, has been similar to the rise over the equivalent period in the previous recession. Although unemployment will probably rise further, there should be fewer people shunted out of the labour market who find it hard to get back.

On the other hand, future GDP growth is likely to be slower because there will be less net inward migration. With jobs scarcer and the pound weak, Britain is a less attractive destination and some migrants are returning home. Moreover, both Labour and the Conservatives are committed to curbing future immigration.

The British economy is not alone in expecting a duller future. The euro area looks set for an even weaker recovery, on IMF forecasts at the start of this year. And the IMF envisages Britain outgrowing America next year. The economy has longstanding weaknesses, such as poor skills and a congested transport system. But it retains important strengths, such as its openness to trade and capital, its lead in business services, a strong scientific base and world-leading universities. Michael Porter, a professor at Harvard Business School who has made a career out of studying competitiveness, believes that Britain still remains a “very attractive value proposition”.

Britain's political economy is on trial as much as its economy. The government is currently spending four pounds for every three it receives in revenues. This reflects not just the severity of the recession but misjudgments during the good years. It was a mistake to be borrowing at all, let alone over 2% of GDP, in 2006 and 2007 when the economy was strong. Moreover, that deficit would have been even higher but for inflated receipts from ebullient property markets and financial firms.

Mr Darling was able to announce a somewhat improved forecast for this year's borrowing—but only to the extent that terrible is better than horrendous. He is now expecting a deficit of £167 billion in 2009-10, rather than his earlier estimate of £178 billion. But that still leaves it extraordinarily high, at 11.8% of GDP; and it will fall only to 11.1% in 2010-11. That chancellor is expecting the gap to narrow, but by 2014-15, there will still be a shortfall, of 4% (see chart 3). Before borrowing blew out so spectacularly, that would have seemed far too much.

Some of the reduction will happen automatically as the economy recovers. However, a stringent programme of fiscal retrenchment will also be necessary. Mr Darling stuck to his guns about deferring the start of this to 2011, on the grounds that the economy is still too weak to start the heavy lifting this year. But the main weakness in the chancellor's plans is that he remains coy about where the spending cuts will be made. Furthermore, his planned tax rises on high earners may well yield less revenue than he hopes. And his predictions for the public finances are acutely vulnerable to setbacks in his forecasts for strong GDP growth from 2011 until 2014.

For the moment, investors and credit-rating agencies are giving Britain the benefit of the doubt. But that will not last beyond the election. Mr Darling's budget is the last breath of a dying government. What will really count is the first one of the next parliament. That budget will have to do what the chancellor failed to do: set out a credible plan for reducing the deficit, grounded in sober rather than wishful forecasts for growth, decide where spending cuts will actually be made, and also—in all probability—announce additional tax increases.

Britain's economy was overhyped before the recession, but the gloom has been overdone since the great fall. If a new government can show that it will get a grip on the public finances, this would help bolster confidence. The country's economic future may be less dazzling than before but that glitter turned out to be fool's gold. After those excesses, a period of private sobriety and public austerity may prove to be no bad thing.