Sunday, August 31, 2003
Labour loses pole position
Posted by David Smith at 06:52 AM
Category: David Smith's other articles

Here's an interesting conundrum, pointed out to me by an overseas visitor the other day.

Britain has been prospering under this government in a way few could have expected back in 1997. Inflation and unemployment, the two components of the "misery index", are both low. Britain's jobless rate is lower than that of America, Japan, Germany and France, or most other countries you could mention.

The economy may be in a softish patch but growth has been continuous since 1992.

Retail sales in the latest three months were up a robust 4.5%, in volume, on a year earlier, so consumers have not been depriving themselves of life's luxuries.

And yet - and here's the conundrum - the government has lost its commanding lead in the polls. Before life got serious, Tony Blair used to include in some of his speeches, usually to Labour party audiences, a version of Monty Python's "What have the Romans ever done for us?" sketch. His point was that the government had done a great deal but was getting little credit for it from its own supporters.

Blair could afford the joke because at that time Labour was miles ahead of the Tories in popular opinion. Now the government sometimes falls behind even a weak opposition and the prime minister must be starting to feel like Nero.

I know what you are probably thinking at this point. Yes, Labour support is wavering, but this is entirely due to the aftermath of the war with Iraq, unease with a government apparently addicted to spin and the curious set of events being played out at the Hutton inquiry.

I would tend to agree, except that there also appears to be an economic explanation for the government's falling popularity. History tells us, and my chart confirms it, that Labour's 1997 election victory was built on wresting the mantle of economic competence away from the Tories.

Until recently, political attitudes in Britain tended to settle along predictable lines. Labour was good at "soft" things, like pumping lots of money into health, education and public services. The Tories, in contrast, were hard-headed managers, the kind of people you would want in charge of the economy, particularly if it was in trouble.

No matter that the two parties did not always live up to their billing - that was the way it seemed to be. Until, that is, after the 1992 general election. It may have been simply the humiliating but ultimately beneficial event of Black Wednesday, September 16, 1992, when sterling was forced out of the European exchange-rate mechanism, despite a resort to 15% interest rates.

It could have been the subsequent sharp rise in taxes to cure a budget deficit of almost 50 billion, which added insult to injury. But the effect was that the Tories, under John Major, surrendered the mantle of economic competence to Labour.

Labour, having been handed this gift, built on it. The party presented an economic agenda that was safe for the middle classes. Neither income tax nor Vat rates would be raised.

By the time Gordon Brown got to the Treasury, he had discovered other ways of raising tax. For most voters, however, this was a small price to pay for the rest of Labour's economic package - sensible monetary policy in the form of Bank of England independence and prudent fiscal policy, with public spending initially kept under tight control.

The Tories were shellshocked after a landslide defeat and they became the party that voters were reluctant to trust. Labour's poll lead on economic competence increased after 1997. As recently as March 2002, after announcing big increases in health spending in his budget, the chancellor's ratings were sky-high.

But not any more. As of this summer, Labour is no longer seen as more competent at managing the economy than the Tories. Some polls, indeed, show the opposition ahead on this question. Given the performance of the economy, this is surprising, but it also suggests that Labour's political struggles have at least part of their basis in economics.

Why has this happened? One possibility is that the Tories have suddenly started to impress, or at least successfully pick holes in Labour's economic record. Michael Howard is proving a busy and effective shadow chancellor, but I doubt that even he would claim that his barbed attacks are the talk of voters at the Dog & Duck.

A second, more straightforward, explanation relates to the growth of incomes and, in particular, the April tax hikes. Average earnings are rising by roughly 3% a year and so are prices (measured by the retail prices index), implying very little growth in real incomes.

The picture, in fact, is slightly worse than that. The tax and price index, which takes into account both rising prices and the impact of tax changes, is up by nearly 4% over the past year. That is the amount by which people need to have raised their incomes just to stand still. Compare that with the 3% rise in earnings we have seen and it is not hard to see why people might feel disgruntled.

There is a wider point related to this. People may have wanted extra money to be spent on health and education, or at least that is what they told the pollsters.

What they also wanted, however, was for somebody else to pay for it. April's tax rises, mainly in the form of higher National Insurance contributions, were unwelcome.

When they are combined with justifiable scepticism about whether the extra money is leading to discernible improvements in public services, the government has at the very least a transitional problem on its hands. However galling it is to Brown, voters see in the rise in government borrowing echoes of the Major era.

They know the remedy then was higher taxes, and they fear a repeat dose. Finally, it could be that the chancellor is a victim of his own success in one key respect. Pretty well everybody agrees that making the Bank of England independent was a masterstroke. The political problem is that, the longer it has been independent, the more people have taken that at face value.

The Bank, in other words, is getting much of the credit for a well-managed economy that would in the past have gone to politicians. The Treasury is left with the tricky bits, like making the public finances add up. Labour's economic reputation has slipped, and there isn't very much it can do about it.

PS: Where are today's "tiger" economies, countries growing at rapid rates as they catch up with bigger competitors? Not in Asia, where the economic crisis of a few years ago and this year's Sars outbreak have meant most of the former tigers have yet to regain their prowess.

Not, I suspect you would say, in Europe. Many economies on the Continent, including France and Germany, are at best stagnant. Ireland is no longer the Celtic tiger. But look a little farther east, and they are there.

HSBC points out that Latvia and Lithuania, both about to join the European Union, are recording 9% growth, better than China's figure of 7%-8%. These countries, together with Estonia and Slovakia, have been growing by more than 5% a year through the global slowdown of the past three years. The "new tigers" should enjoy it while it lasts.

From The Sunday Times, August 31 2003

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