Sunday, October 02, 2005
Brown's luck runs out, or so the Tories hope
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

Who would be a Tory? You have to trudge all the way up to Blackpool, jewel of the north, spout about future policy when you are not sure who your next leader will be, and still face the best part of another four years of Tony Blair. The only person sadder about the latter prospect is Gordon Brown.

For the Conservative party the past eight years has been a salutary experience. One iron rule of politics was that Labour governments always messed up the economy, usually after having been provided with plenty of ammunition to do so by the Tories. Another was that all modern governments have, sooner or later, faced an economic crisis that turned the electorate against them.

So the Tory task of opposition seemed straightforward. It should oppose Labour with tenacity. It should develop alternative economic policies that were fresh and radical without being too scary. Mainly, however, all this was camouflage for waiting for the economy to turn sour.

That was the strategy during the 1997-2001 term, under William Hague. But the economy carried on growing. It was also, more or less, the approach during Blair’s second term. Successive shadow chancellors tried to shape a Tory economic policy that was close enough to Labour’s but sufficiently distinctive — a little less public spending, a little less government borrowing. But none of them, Kenneth Clarke, Peter Lilley, Francis Maude, Michael Portillo, Michael Howard or Oliver Letwin, left much of a mark on policy, or really laid a glove on Brown.

So what should George Osborne, the current shadow chancellor, do? Should he carry on developing ideas like the “flat” tax? Or should he just wait for the economy to hit the rocks and fatally undermine Brown? The flat tax was singled out for special mention by Brown last week. He told the party faithful in Brighton it would be as big a disaster as the poll tax, cost £50 billion in cuts in public services, appealed only to Estonia’s “neo-conservatives” and would mean that the millionaire paid the same tax rate as the young nurse.

It would also, as the Treasury’s research shows, be more efficient, reduce compliance costs and be likely to “stimulate the economy and lead to increased employment”. Osborne has sensibly recognised that a pure flat tax would be unlikely to work here, given the complexity of the fiscal structure, and has talked about moving to a flatter tax. He should stick to it as long as he has the shadow chancellor’s berth.

What about the scope for an economic accident that hits the chancellor hard? While conscious of the fact that I tend to see things through economist-tinted spectacles, it seems to me that every change of government in modern times has been triggered by economic events.

Thus Harold Wilson won for Labour in 1964 and 1974 after episodes of Tory boom and bust, the second being particularly dramatic, in between losing to Edward Heath in 1970 as punishment for the 1967 sterling devaluation and subsequent austerity programme.

Margaret Thatcher won in 1979 on the back of the 1976 IMF crisis and the 1978-79 winter of industrial relations’ discontent. Blair’s 1997 landslide was the electorate’s way of punishing the Tories for, successively, the recession of the early 1990s, the Black Wednesday humiliation of sterling’s September 1992 exit from the European exchange-rate mechanism and the subsequent tax hikes.

The question is whether things are going to be bad enough for voters to decide that, having experienced Brown as chancellor, they do not want him as prime minister. The bad economic news is coming thick and fast. Growth was only 1.5% in the second quarter, compared with a year earlier, after an even weaker 1.2% in the first. That explains why claimant unemployment has risen for six months in a row.

Nor is there much sign of a subsequent rise in demand. I take issue with the CBI’s claim that retailing conditions are the worst for 22 years, but things are grim. When retailers start slashing prices before September is out, as House of Fraser did last week, you know something is up.

Neither the labour market nor the housing market is supporting consumer spending. Nationwide said house prices fell 0.2% last month and are only 1.6% up on a year earlier — the weakest 12-month performance since 1996. Mortgage approvals were better last month but the property market is still convalescing.

Meanwhile, a few chickens are coming home to roost on the chancellor’s management of the supply-side of the economy. The World Economic Forum, while still polite about the British economy, said it had slipped to 13th place in its competitiveness league table, from fourth in 1997 and 11th last year. The slip is due to the mindblowingly complex tax system Brown has created, poor infrastructure and an inadequately qualified workforce. Productivity in the second quarter was a paltry 0.5% up on a year earlier.

How bad could it be? Nobody is predicting disaster for the economy, but plenty are starting to forecast uncomfortable times ahead. Given how good things have been for more than a decade, that could rebound badly on the government.

Lehman Brothers, in a new report, Choppy Waters Ahead, predicts growth of only 1.6% this year and 1.5% next, and a further rise in unemployment. It is also assuming £8 billion of tax hikes in the March 2006 budget as Brown tries to stop the deficit heading into the stratosphere.

That, I think, would be one way to hand the Tories a gift and the chancellor will move heaven and earth not to do it, even if it means further fudging the fiscal rules. Even so, it is not a rosy prospect. Some would say a post-election slowdown in the economy is good politics, as long as things perk up in plenty of time for the next election. True, but this has the feel of a prolonged period of slow growth. In the absence of a vibrant consumer, the economy lacks a proper motor.

Will the Bank of England help Brown out? Recent data have got rid of most of the nonsense about August’s interest-rate cut to 4.5% being unjustified. If the monetary policy committee (MPC) is not cutting rates when growth is this weak, when should it be doing so? Richard Lambert, one of the cutters, made clear last week that he saw the economic risks on the downside. Inflation, currently 2.4%, is above the 2% target because of high oil prices, but that should not unduly worry a forward-looking MPC.

The committee meets this week but is highly unlikely to act on rates. However, the weak data have brought next month — when the Bank will have a new inflation report — back into the frame. Lehman Brothers, incidentally, expects cuts every three months for the next five quarters, starting in November.

It will be touch and go. Having signalled after the August cut that rates were likely to be on hold for a considerable time, a reduction next month would leave Mervyn King — the first governor to be outvoted in an MPC decision — with egg on his face. I don’t suppose the chancellor would mind too much.

PS Proof, to me at least, that Blair could get a standing ovation for reading out the phone directory. During his speech in Brighton on Tuesday, the prime minister referred to the government’s achievements in Britain’s cities: “waterfronts and canals renewed, business up, employment down”. I think he meant unemployment, but they clapped all the same.

Mind you, the chancellor has also been guilty of loose language in recent days, by continually referring to a house-price “bubble”. Bubbles, by their nature, burst. Since the Treasury does not appear to expect this to happen, it should urge Brown to use a different word.

From The Sunday Times, October 2 2005


Here’s a passage from ‘The Commanding Heights’ by Daniel Yergin and Joseph Stanislaw:

Malaise and Inflation

What had been confidence in government knowledge was now turning to cynicism. The Keynesian paradigm was not what it seemed to be. It was not all that easy to manage the economy by wielding the levers of fiscal policy. In fact, it was not clear, with all the lags and uncertainties, that it could be done at all. Indeed, critics argued that the effort to apply Keynesianism was in itself inherently inflationary. Instead of picking up the slack of inadequate private sector investment as Keynes had proposed in the 1930s, public spending, it now seemed, was crowding it out.

Confidence was also ebbing in the ability of government to solve major social problems through big, interventionist programs. However altruistic and idealistic the purposes of these programs, the application of new methods of cost-benefit analysis combined with everyday observation, led people to question whether the public was getting value for the tax dollars it spent an them.

In a low-inflation, growing economy, the public had accepted the tax burden. But with recession and slow growth - and with inflation pushing people into higher brackets - taxes stoked the anger of the public. Conservatives had traditionally argued that high taxes on working people and high transfer payments to non-workers held back the economy. That had, no less traditionally, been dismissed as the "Fanciful ideology" of the right. But now this contention could no longer be dismissed; indeed, a new wave of academic research supported the assertion."

The above section describes the period of the Carter administration in the late ‘70s when the US was struggling with stagflation and a high oil price. Well, we know what happened next.

Replace ‘fiscal policy’ with ‘monetary policy’ and ‘working people’ with ‘hard-working families’ and, voila, there we have a UK Conservative platform for today. What goes around…

Posted by: David Sandiford at October 7, 2005 12:29 PM