Sunday, August 24, 2008
Labour wilts as battle over the economy looms
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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Life does not get much better than this for the opposition. After years of seeing his predecessors baited and beaten by Gordon Brown, George Osborne is in the position of doing the goading. The job of shadow chancellor, long a poisoned chalice, has become a sparkling glass of champagne.

Brown knows what this is like. He took over as shadow chancellor after Labour's demoralising election defeat in April 1992. Many in the party thought if they could not win in those circumstances of painful recession they could never win at all.

But Brown saw the Tories' economic reputation shattered by Britain's forced exit from the European exchange-rate mechanism (ERM) on "Black Wednesday", by tax rises and by a squeeze on public spending.

The more economic misery has piled up in the past 12 months, the more the Tories have made hay. On the key opinion-poll question of "economic competence" which party is trusted to raise living standards? Brown and Alistair Darling enjoyed a seven-point lead over Osborne and David Cameron a year ago, according to YouGov, The Sunday Times's pollsters.

Labour's Black Wednesday moment came with the prime minister's shenanigans last autumn over whether to call an early election. That forced Darling into a shamelessly political and hastily assembled pre-budget report, including copycat announcements on inheritance tax and non-doms, which voters saw through.

Osborne and Cameron moved into the lead on economic competence, a lead that has grown in recent months and at present is a two-to-one advantage. It recalls the kind of lead the Conservatives enjoyed over Labour on this question in the 1980s.

The chapter of accidents has got longer, whether the botched nationalisation of Northern Rock, the damage of the abolition of the 10p income-tax band and changes to capital-gains tax, or the further damage of retrospective road-tax rises.

Osborne and his team acknowledge that they are beneficiaries of an economy slowing towards at best stagnation, a chronically weak housing market and a sharp squeeze on household finances. But they think the shift goes a lot further than that.

At the beginning of the year Brown and Darling stood shoulder to shoulder at Downing Street press conferences, the aim being to demonstrate that compared with their lightweight opponents, these were the men you could trust to steer the economy towards better times. As a strategy it has flopped, so far at least.

So has the idea that you should grab hold of nurse for fear of something worse. Voters may not yet know enough about how well or badly a Tory government would run the economy, but they show no sign of returning to Labour's clutches.

So Labour is trying a new tack. Last week Yvette Cooper, the Treasury chief secretary, launched an attack on what she called "Cameronomics", which she claimed was full of "risks and contradictions", including 11 billion of unfunded tax promises.

I hope she ditches the expression Cameronomics and has some better arguments. For her to accuse the opposition of unfunded promises after a 2.7 billion unfunded tax "giveaway" to buy off backbench opposition to the 10p cock-up is just silly.

The next few months will be crucial. Eric Pickles, the Conservatives' local-
government spokesman, said last week Labour could not win the next election (though he added that the Tories could still lose it), but the position is more fluid than when Brown was confidently preparing himself for office more than a decade ago.

The scenario sketched out by Bank of England governor Mervyn King this month, in which a difficult economic adjustment would play out for the next 12 months, followed by a return to a "not so bad" economy, could just play into Labour's hands in time for a May 2010 election though it would be too close for comfort.

There is no truth in the suggestion that the Tories are getting cold feet about winning because of the state of the economy. The ideal time for an opposition to take over is when the government is seen by voters to have messed up the economy.

Labour's position is not irrecoverable but it requires just about everything to go right. Weak energy and commodity prices will be needed to ease the pressure on household finances. The rise in unemployment will need to be modest.

The government's decisions in the wake of the twin shocks to the economy, including this autumn's proposed Brown-Darling economic rescue package aimed at housing and downtrodden families, will need to look better than seems likely now. An option floated here, that councils should become mortgage providers again to fill the gap left by funding-constrained lenders, was pushed by local-authority leaders in a letter to The Times last week.

The government, though, also needs to show it is in control of its finances. Official figures showed public-sector net borrowing of 19.1 billion in the first four months of this fiscal year, up from 8.4 billion in the corresponding period of last year.

Economist John Hawksworth thinks the Treasury is on track for 50 billion of borrowing this year, even without any additional measures. In cash terms, the record 51 billion of 1993-94 is in sight.

Last week, Osborne opened up a new front, criticising Labour for burdening future generations with the consequences of its economic mistakes. The government was "willing to mortgage the country for its own short-term survival", he said. The Tories will attack any autumn giveaway on this basis.

They, to recall one of Margaret Thatcher's famous lines, are enjoying this. The question for them is when to lift the veil on the detail of their economic plans, without giving too many hostages to fortune or ideas for the government to pinch.

In the recent past, the Tories have suffered from providing too much detail, as did Labour in 1992. And so far the plans that Osborne has put up for the government to steal, notably his proposed tax clampdown on non-doms, turned out to be elephant traps for the Treasury.

The economic battle between the parties is about to enter its most intense phase. Labour have to put the errors and confusion of the past 12 months behind them. The Tories' aim has to be to not let them.

PS: All good things come to an end and, according to the Office for National Statistics, Britain's record expansion finished in the second quarter, growth being revised down from 0.2% to zero. So the record was 63 consecutive quarters of growth, not 64, and the economy will require Houdini-like properties to avoid a quarter or two of declining GDP, with most economists picking the current three-month period as being the one likely to show the first negative number.

Everything was weak in the second quarter. On the output side, manufacturing and construction fell, while services grew only modestly. As for expenditure, household spending slipped marginally but investment was sharply lower.

I would make more of the end of the great expansion were it not for the fact that we are due a big so-called Blue Book revision of the national accounts figures on September 30. That may give us a different picture of the economy's recent performance, though it will not change the fact that we are in a sharp slowdown.

From The Sunday Times, August 24 2008