Sunday, March 08, 2015
The feelgood factor's back - will it work for the Tories?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

The feelgood factor is often elusive. But it is back. Consumer confidence is riding high, wages are once more outstripping inflation and unemployment continues to fall.

The misery index, invented by the American economist the late Arthur Okun, is arrived at by adding the country’s unemployment and inflation rates together. Currently, with an unemployment rate of 5.7% and inflation of just 0.3%, it is at its lowest level since the late 1960s, according to Capital Economics. Both Capital and Oxford Economics expect further falls – a lessening of misery – as inflation and unemployment fall further.

If misery is in retreat, confidence is strong. The GfK-NOP measure of confidence, which has been running for more than three decades, has risen by 30 points over the past two years, is well above both its long-run average and pre-crisis levels and has not been higher for more than a decade.

The Institute for Fiscal Studies attracted a lot of coverage a few days ago for its report that living standards – real household incomes – are broadly back to pre-crisis levels. In fact that was not news; the Office for National Statistics said as much last year on the basis of its real household disposable income per head measure.

There was, though, plenty of interest in the IFS report. One surprise was that the fall in real incomes as a result of 2008-9 recession, the deepest in the post-war period, was at 4% smaller than the 5.7% drop in the early 1980s. That is testimony to The Bank of England’s alacrity in cutting interest rates hard, Alistair Darling’s temporary fiscal stimulus and the fact that benefits were protected until well into the coalition’s period in office.

The IFS also noted that real incomes are now increasing, if not at a riproaring pace, with some of the fastest increases coming through for young people, who were disproportionately hit by the fall in real wages.

The rise in real incomes now under way should mean this will not, as Labour sometimes claims, the first parliament in living memory in which living standards have fallen. The ONS real income per head measure is still a little lower than it was when the coalition took office in May 2010. In the third quarter of 2014, the latest data available, it was 0.8% lower than in the second quarter of 2010. When the numbers are available for the second quarter of this year, which unfortunately will not be until late September, it should confirm an admittedly small rise in living standards.

Labour appeared to switch in recent days to a safer claim, which is that real wages will fall during this parliament. That is still more likely than not. Since May 2010 average earnings have risen by 8.9% while consumer prices are up by 11.1%. But the gap is smaller than many think, and it is closing, though official earnings growth may be adversely affected in the next couple of months by bonus distortions a year ago.

Even so, the Recruitment and Employment Confederation, in its latest report on jobs, published on Friday, noted that permanent and temporary employment is increasing strongly, and that salaries are rising at a “marked” pace across a range of sectors. Engineering, construction, medical and executive and professional roles are where staff demand is strongest and running up against skill shortages.

Nothing will change the fact that the rise in living standards now coming through compares unfavourably with previous recoveries, as the IFS noted. That is part of the price the economy has paid for the cushioning of the fall in real incomes when the crisis hit. It is also a reflection of weak productivity.

It is mainly, and politicians on both sides should be honest about this, the consequence of the permanent loss of prosperity inflicted upon the economy by the crisis. We lost a chunk of gross domestic product that we will never get back, and weak living standards have been a part of the economy’s adjustment to that.

What we do not know, of course, is whether the improving feelgood factor showing through now will translate into votes. Though there is tentative evidence that the Tories are edging up in the polls, they have yet to decisively break away from Labour. In Britain’s electoral system, where the existing boundaries favour Labour, neck and neck is not good enough for the Conservatives. George Osborne’s March 18 budget, of which more next week, may provide a trigger for stronger Tory support but that remains to be seen.

Though the default position for many pollsters is that elections come down in the end to the wallet and purse, what are known in America as “pocketbook” elections, there are important exceptions to the rule. In 1997, Labour won a landslide victory in spite of the fact that real household disposable incomes per head rose by more than 9% in the three years leading up to polling day.

In 1979, astonishingly, real incomes per head rose by more than 15% in just two years leading up to the May poll of that year but voters rewarded Labour by electing Margaret Thatcher.

In both cases there were extenuating circumstances. For Kenneth Clarke, chancellor in 1997, it was an uphill struggle against public perceptions of a Tory party fractured on Europe, tarnished by sleaze, and living with the embarrassing legacy of Britain’s exit from the ERM (exchange rate mechanism) in 1992. For Labour in 1979, there was the humiliation of the International Monetary Fund bailout of 1976 and, more importantly, the winter of industrial relations’ discontent of 1978-9.

This time, the Tories cannot hope to match the pre-1997 and pre-1979 rises in real incomes, still have issues with Europe and have a harsher image with many voters than the actual austerity the coalition has imposed justifies. Labour has the legacy of being in charge when the economy crashed in 2008-9, a leader who does much worse than his party in the polls and a perception, which even many of its best friends would agree with, that it is not ready for a return to government.

It is better for a governing party to be fighting an election against a backdrop of strongly rising employment and rising real incomes than the alternative. Whether the latter has come too late, and will be enough to overcome voter scepticism, remains to be seen. Either it will be a pocketbook election, or another exception to the rule.