Sunday, April 05, 2015
The economy's doing better - have voter memories of past chaos faded too?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

A landmark has been passed, and sooner than expected. Living standards, measured in the conventional way, are higher than they were than the coalition took office, as George Osborne was quick to pick up on a few days ago.

Now, the last thing you want to read is somebody slapping themselves on the back but it has long been my expectation – rehearsed here on a number of occasions – that this parliament would not see the first fall in living standards in living memory, as some repeatedly said, but a rise.

The danger was that we would not know about this rise until after the election – had the recovery in real household disposable income per head to spring 2010 levels come in the first quarter of the year rather than the final quarter of 2014 the figures would not have been available until June – so it would have been a forecast rather than a cat. It is now a fact.

Of course, based on current data, the rise since May 2010 – the second quarter of 2015 – is minuscule, just 0.2%. In the circumstances, however, even that is a considerable achievement. It was always the case that the financial crisis was going to make us poorer, as was the task of tackling a record peacetime budget deficit that resulted from a combination of crisis-induced recession and the public spending splurge of the 2000s.

One of the mechanisms for supporting living standards, aggressive cuts in interest rates, had already happened when the coalition took office. Bank rate was cut to 0.5% in March 2009. In May 2010 there was little or no room to cut further. Add commodity price rises (now reversed), negligible credit growth, and the eurozone to the necessary deficit reduction measures and even a modest rise in living standards is much better than it might have been.

The real household income figures came with the latest gross domestic product numbers, which saw growth revised up last year to 2.8%, from 2.6%. Before too long 2014 growth will be shown to have been 3% or more, which is what most of us thought anyway.

We have got so used to this being described as the slowest recovery on record – which we will not know for sure until we have had years of data revisions - and to certain politicians saying there was no growth at all in the coalition’s first three years - that it is worth reminding ourselves of the numbers.

Growth in 2010 was 1.9%, 2011 1.6%, 2012 – when the euro seemed on the verge of break-up – 0.7%, 2013 1.7% and 2014 2.8%. That is an average of 1.75% a year on current data; slow growth but not no growth, at any time.

Take sharply declining North Sea production out of the figures (Scottish Nationalists please note), and you get a better picture of underlying growth. The numbers there are 2.3%, 2.2%, 1%, 1.7% and 2.9%, an even more respectable average of just over 2% a year. Not bad in the circumstances. The mistake was to think normal service could be resumed quickly in the aftermath of the biggest crisis in a century.

Not only are the official economic numbers looking better but so are measures of consumer confidence. The GfK-NOP consumer confidence index has been running since the 1970s and last month rose to its highest level for nearly 13 years.

Nick Moon, the veteran pollster, head of social research at GfK, had thought consumer confidence had hit a plateau at the end of last year after one if its strongest rises on record. In fact it has risen by eight points over the past three months. Much of this reflects public perceptions of the economic situation, up 16 points in the past year, and willingness to make major purchases, up by a similar amount.

The reason I highlight these numbers is that, as well as being a source of fierce debate among the political parties, they have the potential to be an important determinant of the way people will vote on May 7.

The usual narrative on this is that the Tories should be doing a lot better than they are in the polls given the state of the economy, to which the usual counter is that they would be doing better if only most people felt the recovery, which they are not. It takes time, in other words, for an upturn to filter through.

There has to be some truth in that. Real household disposable incomes per head are a mere 0.2% up on the spring of 2010. That average conceals a lot of falls, as well as rises. Most analysis suggests the rises have been particularly concentrated among older voters, who my mailbag and e-mails tell me are inclined to be a little curmudgeonly about it, and do not regard the past few years as a cause of great celebration.

Even so, most people do not, either, ask themselves the Ronald Reagan question – am I better off than four or five years ago? They look at how they are doing now, and here the numbers are rather good. Real disposable incomes per head are up 1.9% over the latest 12 months. Aggregate wages and salaries have risen by 5.3% at a time of virtually no inflation. A rise in employment is included in that but it is still a hefty increase, the biggest for seven years.

All of which raises a second possibility, supported in particular by the consumer confidence index but also by some of the other numbers. This is that, for many voters, the fear has gone. Falling unemployment and low inflation make for a very low misery index but they also make people worried less about the future.

The days when the banks were collapsing are a long time ago. The period when Britain was running a budget deficit which caused the then head of Pimco, the world’s biggest fund manager – which counts Ed Balls’s brother among its senior employees – to say Britain was sitting on “a bed of nitroglycerine” is also a long time ago.

A Labour government may well be chaotic – I cannot remember an opposition less prepared for government – but the potential descent into national chaos under Labour evoked by David Cameron and George Osborne is a hard sell to people who are generally upbeat. People may not think ‘crisis, what crisis?’ but the extreme conditions of 2007-9 have faded in the memory.

Governing parties face a dilemma on this. They want living standards to be rising and for recovery to seem secure, and both those conditions are currently met. The risk for the coalition is that they have also made the economy safe for Labour in the eyes of some floating voters.

It has to be better to have rising confidence and a strong economy to sell to voters than the alternative. It should pull votes back to the Tories and the Liberal Democrats and there is some evidence of that in the polls. But the better people feel, the less they may fear change. That is why this election is far from plain sailing.