From the start, Blair and Brown were aware of the reputation Labour had for being a ‘tax and spend’ and high inflation party and they were anxious to show how different ‘New’ Labour was from the old.

The commitment to public ownership (Clause Four) had been removed in opposition, and the party had accepted most of the Conservatives’ tax changes and industrial relations reforms. They also appeared to be more positive about Europe and the single currency.

In his first four-year tenure at the Treasury, Mr Brown won plaudits from all quarters on his well-judged stewardship of the economy. He was lucky with his inheritance but he kept growth on course. His principal contribution was to hand over responsibility for interest rates to the independent Monetary Policy Committee, under the chairmanship of the Governor of the Bank of England.

With most of the key indicators moving in the right direction, the economy was the strongest card in Labour’s hand during the re-election campaign, and the electorate rewarded Labour with the biggest majority ever won by a government seeking re-election.

After a relatively straightforward first term, Mr Brown faced a much more testing time between 2001 and 2005, largely because of developments in the international environment.

• Several years of very robust growth in the US economy led to a large American balance of payments deficit.
• At about the same time, a boom on the equities market, underpinned by technology sectors such as telecoms, went into reverse.
• These difficulties were compounded by a rise in political tensions linked to September 11th and Iraq, which undermined consumer and investor confidence.

As a result, the US economy slowed sharply and much of the global economy followed suit.

The UK economy, however, continued to grow and create jobs despite the turbulence elsewhere, but at a price.

To replace the gap in activity left by flagging exports and a sharp slowdown in investment, the authorities encouraged consumers to spend.

A steady rise in employment, annual increases in real earnings and lower interest rates (which increased disposable incomes, made borrowing cheaper and saving less attractive) tilted spending towards the personal sector, both the high street and the housing market.

The pivotal role of the housing market was a key reason the Chancellor could not recommend a referendum on the single currency in June 2003.

In the second half of the 2001 Parliament, these trends became even more marked.

Not only was monetary policy loosened, with base rates falling to 3.5% in July 2003, the lowest since 1955, but in 2002, the Chancellor announced his intention to boost spending on public sector services.

Underpinned by household spending and government consumption, GDP growth picked up, inflation and base rates remained historically low, unemployment continued to fall and employment rose.

The UK, judged in terms, of the main macro economic indicators, looked to be in good shape.

Among Mr Brown's economic achievements were:

• the longest period of sustained economic growth (60 quarters) since records began in 1870;
• the highest employment (29 million) ever;
• the lowest unemployment (880,000) since 1975; and
• the best combination of inflation/interest rates since 1945.

Early in Mr Darling’s tenure, a number of weaknesses became increasingly apparent. The imbalances in the economy, between industry groups, regions, savers and borrowers, public and private sectors, and the domestic and internationally traded goods sectors, were becoming more marked and looked to be harder to sustain.

With a slowing of the housing market, a rising debt burden and a growing fiscal deficit, consumer confidence weakened, and slower growth was the likely outcome.

The housing bubble

The impressive period of low-inflation growth the UK had recorded since 1992 had become increasingly dependent on consumers who spent and borrowed and governments which spent and borrowed. It was a very unbalanced economy to which net trade and investment made too small a contribution.

When interest rates started to rise in 2007, the housing bubble burst and activity started to slow. What the Governor of the Bank of England, Mervyn King, called the ‘NICE Decade’ – non-inflationary, constant expansion (from 1997-2007) - was over.

Recession begins

By the time the UK was officially in recession at the end of 2008, the global credit crunch had destabilised the financial sector, adding to the downward pressures on the economy.

The authorities have therefore faced unprecedented challenges and while the credit crunch did not cause the economic slowdown, the collateral damage from the financial crisis could well have an impact on the pace and direction of recovery.

The combination of economic downturn and banking turmoil presents the policymakers with a unique challenge. The traditional monetary and fiscal tools have been employed very decisively to re-start the economy, although their effectiveness will depend on the recovery and responsiveness of the financial sector.

And, once the recession ends, the UK must establish a new path for sustainable growth. There is no point looking to high street spending, the housing market, financial services and the public sector to generate jobs and raise living standards. The new agenda has to be more internationally focused, with the UK paying its way in the globalised economy.

The general election of 2010 could be a watershed in the same way as those of 1945 and 1979.