Tory long-term economic plan? Not even the propaganda is working
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Version 0 of 1. The Tories think they have two trump cards to play in the election. One is Ed Miliband’s suitability to become prime minister. The other is the economy. They have consistently had a lead in opinion polls on economic competence and David Cameron has sought to exploit it by contrasting the “good life” he can deliver with the “coalition of chaos” that would follow a Labour win. Opinion polls suggest voters are not as receptive to the Tory message on the economy as the prime minister might have hoped. There is still time, of course, and it could be that the economy will be a sleeper issue that starts to sway undecided voters as polling day draws near. There is, though, a more worrying explanation for the Conservatives, namely that only their hardcore supporters are receptive to the cocktail of dodgy statistics, platitudes and uncosted promises that Cameron has served up. To amend Abraham Lincoln’s famous saying, in a UK general election you don’t need to fool all of the people all of the time, you just need to fool enough of the people for the duration of a six-week campaign. If the polls are right, the Conservatives are struggling to do even that. Not enough voters are buying the idea that Cameron and George Osborne have miraculously transformed the economy from basketcase to world-beater in five years. And there’s a simple reason for that. It’s not true. Let’s start with the coalition’s own record. The natural tendency of an economy is to grow a bit each year. A combination of better equipment and the development of new skills, together with innovation means that in only a handful of years since the second world war has the UK failed to grow. Since 1945, the economy’s average growth rate has been around 2.5% a year. So it is not a miracle that the Conservatives have presided over a growing economy because that’s what economies do. They tend to grow particularly quickly during recoveries from recession, when there is plenty of spare capacity that can be used up and interest rates can be kept low without a risk of inflation. Yet despite the Bank of England keeping interest rates at 0.5% for the duration of the 2010 to 2015 parliament, the recovery has been weak, with growth averaging a bit more than 1.5% a year. Even worse, most of the growth has been the result of a rising population rather than higher productivity. Growth per head has been nugatory, which explains why real incomes have been squeezed. It may also explain why voters are resistant to one of the Conservative party’s favourite soundbites, namely that the “long-term economic plan is working”. An account of how and why the chancellor came up with his long term economic plan is contained in William Keegan’s smashing new book, Mr Osborne’s Economic Experiment, published by Searching Finance. My Observer colleague rightly notes that while it suited the coalition politically to paint the UK in the spring of 2010 as a country akin to Greece, the austerity measures imposed were needlessly harsh and counterproductive. Raising VAT and cutting back on capital spending were both serious blunders, and the result was that within two years, Osborne brought the economy to a standstill. Related: Mr Osborne’s Economic Experiment: Austerity 1945-51 and 2010- review – an elegant demolition of the chancellor’s policies At that point, in 2012, the original long-term economic plan was quietly abandoned and another long-term economic plan took its place. Deficit reduction would no longer be achieved in one parliament but in two. The government’s original good intentions to rebalance growth towards investment, manufacturing and exports were overtaken by the need to get growth of any sort. If that meant ramping up the property market, so be it. The process started with the Bank of England’s funding for lending scheme (FLS), under which commercial banks could get access to cheap funds provided they passed them on to small businesses and those seeking mortgages. The money went almost exclusively to the mortgage market. FLS was followed by help to buy, a Treasury plan that offered subsidised mortgages for those people trying to get on the housing ladder. All the while, the Bank of England was sending out the message that there was little or no risk of interest rates going up. Unsurprisingly, the housing market started to motor and, because demand for housing far exceeded supply, property prices started to bubble up. This was more a short-term than a long-term plan. House prices rose to levels that made them unaffordable even with official interest rates at 0.5%, and the property market lost momentum. In terms of the structure of the economy, the old imbalances remain. Manufacturing and construction output have yet to regain their pre-recession levels, while the service sector has expanded the number of low-pay, low-skill jobs. Britain now has a triple deficit problem - a budget deficit of 5% of national income, a balance of payments deficit of 5.5% of national income and a productivity deficit that means output per hour worked is 30% lower than in rival nations. Osborne rightly arrived in office warning that the UK had become far too dependent on consumer debt, but the independent Office for Budget Responsibility noted at the time of the 2015 budget: “Strong growth of residential investment and ongoing growth in house prices and property transactions leave households’ gross debt to income ratio rising back towards its pre-crisis peak” over the coming years. It said that could “pose risks to the sustainability of the recovery over the medium term.” Or perhaps sooner. Albert Edwards, a strategist at Société Générale, is scathing about the handling of the economy since 2010. “After five years of the Conservative and Liberal Democrat coalition government, the UK economy looks like a ticking timebomb waiting to explode after the election.” Edwards gives stick to both sides. In 2008 he described the UK as a Ponzi scheme, but adds: “At least back then the UK was not alone in reaping the sour fruits of economic mismanagement. The US and the eurozone periphery were all sailing in similarly unstable, leaky boats. But now the UK economy stands alone, up to its eyeballs in macro manure. Eventually the stench will fill the nostrils of the currency markets with the inevitable result – another sterling crisis.” Two things have become clear as this campaign has progressed. The first is that the Conservatives do not have a long-term plan for the economy. They have a short-term plan for winning the election. There is no strategy for tackling the UK’s endemic low-pay culture, weak productivity or the £100bn-a-year trade deficit. The second is that the experience of everyday life for so many voters is in stark contrast to the propaganda the Conservatives pump out. Britain is not a richer country than it was five years ago, and its chronic problems remain to be addressed when the next property bubble pops. Plenty of us know that, and we resent being treated as mugs. |