General election: A vulnerability peculiar to the UK underpins its recovery

Taxation and spending have been at the centre of the economic battleground in this election. These are among the few levers with which politicians can influence economic outcomes. Yet, come Friday, we should recognise that the fiscal choices of the new government are not what will primarily determine Britain's fate.

However much people shout about it, the coalition's austerity policy has been far from the most important economic influence over the past five years. The eurozone crisis, global energy and food prices and shockingly weak productivity have, together with monetary policy, been far more important than anything David Cameron, George Osborne or Nick Clegg have done. The same will be true in the years ahead. We cannot yet know what is in store for the new government; much will come out of the blue. But there are some known unknowns, of which three stand out.

The first is productivity. The more goods and services Britain can produce with its labour, capital and land, the richer the nation will be and the easier it will find funding public services. The parties have failed to address the issue during the campaign but, to be fair, they have little power to lift productivity growth in the short term. The private sector will try to become more efficient; the government will have to respond to the success or failure of its efforts.

The importance of productivity for the next government cannot be exaggerated. All of the parties' tax and spending plans are based on the Office for Budget Responsibility's guess that output per hour worked will rise at an annual average pace of 1.8 per cent between 2015 and 2019. This productivity recovery, if it happens, will spring from nowhere. Output per hour has barely grown over the past five years.

Were the productivity crisis of 2010 to 2015 to continue instead, spare capacity would soon be used up and economic growth would fall back to the rate of increase in the working population - which has lately been about 0.6 per cent a year. Cutting the deficit would then require much harsher austerity than even the Conservatives propose.

A second dilemma concerns Britain's labour market. With the employment rate for those aged 16 to 64 already at a record level of 73 per cent and unemployment down to 5.6 per cent, there is a legitimate fear that economic growth cannot be sustained by rising employment for much longer, again suggesting the sustainable rate of growth will soon fall. But we have been repeatedly surprised by the labour market over the past five years.

What if unemployment can fall below 4 per cent without causing inflation? What if employment rates of those over 60 continue to surge? What if part-time employees really want to work longer hours and find suitable jobs? Cut the economy some slack in any of these ways, and decent growth could be sustained for a few more years even without productivity growth. We can also be confident that the Bank of England will probe these possibilities with the loosest monetary policy it feels able to run.

Finally, everyone in Britain should remember that the nation is an exception among advanced economies. No other country runs a budget deficit of about 5 per cent of national income alongside a current account deficit of the same order of magnitude. This is not necessarily a problem, but it is a peculiarly British vulnerability. Were international investors to lose confidence, the result would be a rapid fall in sterling and a rise in the cost of borrowing. The authorities would have few policy levers with which to respond. No one has this known risk anywhere near their central forecasts for the economy.

So whether it is Ed Balls, Mr Osborne or someone else, the next chancellor might shortly set a course for the British economy. More importantly, he or she needs to prepare for the winds of fate.

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