Britain faces rising inflation, record high trade deficit. Chancellor of Exchequer blamed for policies that overheated economy

The economic honeymoon enjoyed by the government of British Prime Minister Margaret Thatcher is coming to an end, and Britons see a season of belt-tightening ahead. Nigel Lawson, the Chancellor of the Exchequer, now is being forced to take steps to curb rising inflation approaching close to 8 percent, and to reduce a foreign trade deficit that threatens to top a record 15 billion ($27 billion) by the end of the year.

The dark clouds now threatening the economic bonanza that Mrs. Thatcher and Mr. Lawson have fashioned in the past three to four years have been gathering since the spring when the chancellor slashed income taxes and encouraged a splurge of spending by businesses and private citizens, much of it financed by borrowing.

The result was a sudden overheating of the economy.

This week Lawson told the House of Commons that, following the stock market collapse in October last year, he had pumped too much life into the economy.

As a result, Lawson has raised interest rates eight times in six months - from 7 percent in May to 13 percent at the end of November. Lawson has also been shown to have miscalculated Britain's foreign trade deficit.

This spring the chancellor forecast an annual trade gap of 3 billion ($5.4 billion). But the rate of spending on imported goods has increased so sharply that in October alone the trade gap was 2.5 billion ($4.5 billion).

Labour Party critics have called Lawson's handling of the economy ``incompetent,'' and his style of economic management ``arrogant.''

More worrying for the chancellor is criticism from his own party in the House of Commons. John Biffen, a former leader of the Commons, said it might be time for Lawson to resign. Terence Higgins, chairman of an influential Commons Finance Committee, said of Lawson's performance: ``The jury is out. We must wait and see.''

Earlier this week Lawson's handling of the economy was sharply attacked by Gordon Brown, the chief Labour spokesman, who charged that the chancellor had left Britain with the largest trade deficit, the highest interest rates, and the second-highest inflation rate in Europe. ``No chancellor has had better luck and worse judgment. All he has done is to create tax opportunities for people who have made vast fortunes. Sooner or later this chancellor will doubtless go. He has failed the country,'' Mr. Brown said.

Lawson described the criticisms as ``trivial.''

Yesterday, the Commons all-party Treasury Committee grilled Lawson, asking him searching questions about the apparent crisis in economic management.

The government's supporters tend to agree that there must be a lot more deterioration in the economy for a real crisis to exist, but they are worried about the political impact of current trends.

In this week's commons debate, former Conservative Prime Minister Edward Heath claimed that the situation was ``critical.'' He said it would be many months before the economy rebounded, and in the meantime, many people would suffer.

Referring to Lawson's claim that interest rates were the only effective economic regulator in present conditions, Mr. Heath said the chancellor was like a man trying to play golf with only one club. ``You have got to have a full set of clubs,'' he said.

Economic growth next year is put at around 3 percent - healthy by post World War II standards. Also, despite the huge trade gap, the Treasury's current account is exceptionally healthy.

Lawson expects to be able to pay back 10 billion ($18 billion) of the national debt as a new round of privatization begins and money flows into government coffers.

But in the meantime, analysts here say it is likely that there will have to be another rise in interest rates early in the new year, and inflation will continue to climb above its present level of 7 percent.

Thatcher is continuing to express confidence in Lawson, but Tory backbenchers are looking for an early economic recovery. If it does not occur, the prime minister may have to consider Lawson's future.