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The economy has been at the heart of the general election campaign. Gordon Brown emphasises the need to support jobs and denounces Conservative plans to cut public spending by £6 billion this year as risking tipping the economy back into recession. David Cameron extols the benefit of making a start on deficit reduction in 2010/11 so that national insurance contributions do not have to rise in April 2011. And Nick Clegg calls for an increase in the personal tax threshold to £10,000 as a demonstration of the ‘fairness’ that is needed if the public are going to support tough measures on reducing the fiscal deficit.
But, as the Institute for Fiscal Studies (IFS) has made clear, all three main political parties have left more unsaid than said. In a detailed analysis of their plans, the IFS concludes that the Conservatives have not specified where £52.4 billion of deficit reduction would come from, Labour £44.1 billion and the Liberal Democrats £34.5 billion. It also said that ‘Labour and the Liberal Democrats would need to deliver the deepest sustained cut to spending on public services since the four years from April 1976 to March 1980’ while ‘the Conservative plans imply cuts to spending on public services that have not been delivered over any five-year period since the Second World War’.
Labour, the Conservatives and the Liberal Democrats have, simply, all been too afraid of the electoral consequences of spelling out where public spending will be cut and which taxes will increase after the election. All saw how the Tories’ ratings dipped in the opinion polls after their flirtation with ‘Age of Austerity’ rhetoric late last year and have concluded that, in a tight election, they cannot afford to tell the public the truth. Instead, they have, predictably, chosen to emphasise spending commitments (e.g. to the National Health Service), tax reductions (e.g. for married couples) or other positive stories (e.g. abolishing university tuition fees).
As a result, there has been far too much debate about whether it is a good idea to cut public spending by an additional £6 billion in 2010/11 and far too little about where up to £60 billion of cuts will come from in subsequent years.
In truth, the argument about the £6 billion of cuts was fought to a stalemate even before the election was called. Some economists say that it would take demand out of the economy at a time when the recovery was fragile; others suggested it would boost confidence and, thus, private spending. Whichever side is right – and I side with those who think cutting spending now is an unnecessary risk - the far more important issue is the make-up of the bigger spending cuts and tax increases that will inevitably follow.
This is not just a question of a democratic deficit – how can the electorate choose which party it wants to govern for the next five years if none of the parties will reveal its approach to the biggest issue that will face the government in the next parliament?
It is a problem for the parties too. Whether the election results in a majority Conservative Government, a minority Conservative Government or some sort of coalition or partnership (which, two days before the polls open, seem to be the three possible outcomes), the next government will have to implement unpopular measures on taxation and public spending, not just in its first few months in office but in every one of the next four or five years. And it will have to do so without having secured the support of the public for those measures. This will make it extremely unpopular. Indeed, Mervyn King, Governor of the Bank of England, is reported to think whichever party wins this election will not subsequently win another one for a generation.
Economists will recognise this situation as a classic game theory problem. If all the parties had cooperated and agreed to be totally open and honest about their spending and tax plans before the election, then the winner would be in a better position to implement its plans in the next parliament. But there was no such cooperation and no single party was willing to break ranks and be the first to set out its plans, for fear that the other two would not follow its lead and that it would lose support. Consequently, none acted and the result is a sub-optimal outcome for all concerned.
The consequence of this failure will haunt the next government every time it announces a tax increase or a cut in spending on public services.
This piece was first published on Left Foot Forward
Tony Dolphin
A new word has entered common usage as a result of this recession. With young people being the worst affected by the downturn (nearly double the percentage of 16-24 year olds are unemployed compared to the rest of the adult population), we’re hearing a lot about those who are not in employment, education or training. Or ‘neets’ as they’ve become known.
This is undoubtedly one of the most important problems thrown up by the recession. There is a mounting body of evidence that being unemployed early in life can ‘scar’ people later on. If you are out of work when young you are more likely to have spells of unemployment later in life. You’re likely to earn less in the future, too. And we know that being in work is massively important for general well-being, sense of identity and social mobility. So the Conservative candidate for Hammersmith, Shaun Bailey, was right to be hitting the streets this weekend to highlight the problem of youth unemployment. Despite a slew of programmes introduced by the Labour government – from guaranteeing jobs to increasing education places – it looks likely that they’ll miss their target of 7.6% of 16-18 year olds being ‘neet’ this year.
The trouble with ‘the neet problem’ is that it isn’t one problem. It’s lots of very different problems that have been unhelpfully bundled together in a single term. How can politicians come up with policies to help ‘neets’ when it includes everything from top graduates unable to find jobs and those leaving school with no qualifications? And what about those who are ‘neet’ in cities dependent on manufacturing compared to those in rural communities? And don’t forget the difference between men and women – women are four times more likely to have an identified barrier to entering the labour market than men.
The things that are stopping these groups entering the labour market, and the policies that would therefore help them find work, are quite different. So perhaps the first step to tackling the ‘neet problem’ would be to ditch the term ‘neet’. Then we can have a proper discussion about the range of policies that are needed to support these very different groups.
Jonathan Clifton
The Green Party published its manifesto yesterday and is clearly taken great pains to emphasise its thinking in policy areas other than environmental issues, such as the economy, pensions, health and employment.
Nevertheless, the name ‘Green’ does tend to focus one’s attention on the environmental policies - so how do the parties compare here?
Clearly, the big issue is climate change and all set out ideas for how they would tackle this problem. The Conservatives want Britain to become the ‘world’s first low carbon economy’, while Labour seeks a ‘low carbon revolution’ and the Liberal Democrats to ‘lead the fight against climate change’. The Greens, however, suggest that ‘only the Green Party understands that this [climate change] is just one sign of the stress our economies and lifestyles put on the environment… it is a warning of the catastrophic social and environmental consequences of business as usual’.
As far as the three main parties are concerned, many of the ideas for reducing carbon emissions are very similar, although they have been given different names. The Liberal Democrats pledge a ‘ten-year programme of home insulation…paid for by the savings from lower energy bills’; the Conservatives a ‘Green Deal’, essentially a programme of home insulation paid for by the savings from lower energy bills; and Labour have an eye-catching ‘Pay As You Save’ scheme, which is … well, you can probably figure it out.
But there are some important differences, perhaps the most obvious being the parties' positions on nuclear power. Both Labour and the Conservatives are for a new generation of nuclear power stations in the UK. The Liberal Democrats oppose new nuclear on the basis that it is too expensive. And the Greens, unsurprisingly, resolutely oppose it both on economic and environmental grounds.
The most striking difference is really in the differing ideologies on how to achieve carbon reductions. While Labour believe active government intervention will be necessary to achieve a low-carbon transition and to generate new green jobs, the Conservatives' approach is much more laissez faire, eschewing ‘rules and regulations’ while embracing ‘incentives and market signals’. The Lib Dems have plans for tougher targets and green investment programmes and the Greens want even higher carbon targets along with direct government investment and even the re-nationalisation of gas and electricity providers.
Of course, these differences may be of little interest to an electorate focused on avoiding recession and dealing with the deficit, which suggests that the Greens’ decision not to lead on their environmental credentials but to focus on economic policies is a smart political manoeuvre.
Jenny Bird
In his speech on the economy yesterday the Prime Minister underlined the need for a fair economy, with growth that will ‘preserve and expand the jobs – and lift the standards of life – of the British people.’
But a fair economy is not simply about restoring growth. Brown’s progressive goals are dependent on how the rewards of growth are distributed. Several high profile reports have recently revealed that strong growth in the decade before the financial crisis failed to address the acute inequality – geographic, social and economic – embedded in British society.
So, after the bust, how will Brown’s recovery fare on fairness?
Efforts to tackle inequality have typically focused on reducing poverty – a noble aim, but it offers limited mileage without parallel endeavours to redistribute the vast wealth at the top. Brown is therefore right to limit top earners with wage freezes for senior public sector workers – a measure first advocated by the Conservative Party.
But while the public sector may hope to set an example, Brown remains silent on wage inequality in the private sector – an indication, perhaps, of the persistent belief that high wages drive entrepreneurialism.
Over a fifth of UK workers are low paid – and millions more are stuck in poor quality, insecure jobs. The rewards of the boom years passed these workers by. The rise of the knowledge economy led to new highly skilled and highly paid jobs, while the low skilled sector consisted increasingly of poor quality jobs in the service economy. Social mobility has remained stagnant for decades, partly as a consequence of this polarisation between lovely and lousy jobs.
Yet the strategy announced yesterday does not rise to this challenge. It reiterates promises from January’s growth strategy to invest in high quality infrastructure and scientific innovation. These measures may well create jobs of the future, and high skill industries will surely secure UK growth and a strong position in global trade. But the Government has offered no policies to improve the quality of employment at the bottom or tackle the low pay that persists in many industries.
Tess Lanning, Researcher, ippr
The latest UK trade figures were awaited more eagerly than usual. Exports are seen as crucial to the UK’s economic recovery and the main political parties are all eager to present themselves as having the best policies for the sector.
Figures released on 9 March show the UK’s trade deficit in goods widened to £8.0 billion in January from £7.0 billion in December. This was mainly the result of a 6.0 per cent fall in export volumes (excluding oil and erratic items).
This will come as a blow to those looking to the export sector to strengthen the UK economy’s recovery from recession. Sterling’s effective exchange rate fell by 25 per cent in 2008; this was supposed to make UK industry more competitive and boost overseas sales of British goods. So far, there is little evidence that this is happening.
The January data are probably a blip – trade data are among the most erratic of all data releases. More worrying is the underlying trend, which shows only modest growth in export volumes over the last year. Of course, this is due in no small part to the weakness of demand in the UK’s main export markets, particularly in the rest of Europe, and it should be that export growth will improve once Europe’s economic recovery picks up speed.
There are also some grounds for optimism in the latest business surveys. The Bank of England’s agents’ report and the CBI’s survey of manufacturing both show a steady improvement in optimism about the outlook for exports in recent months. However, the Bank of England does note that some companies are taking advantage of sterling’s weakness to push up profit margins, rather than allowing it to feed through into enhanced competitiveness. Depending what happens to these higher profits, this probably means some of the potential benefits of sterling’s fall - in terms of more exports, more output and more jobs - are being lost.
Tony Dolphin, senior economist, ippr
Figures showing the UK economy grew by 0.3% in the final quarter of 2009, rather than by 0.1% as previously estimated, are little help to either of the two main political parties in making the case for their economic policies ahead of the election.
Labour will be relieved that the economy has emerged from recession but reluctant to make too much of the stronger growth. In particular, they will be aware that growth in the first quarter of 2010 could disappoint due to the bad weather we have been experiencing and the likelihood that the increase in the main rate of VAT from 15 to 17.5% in January led to some spending being brought forward into the final months of 2009. And the first estimate of Q1 GDP will be published on 23rd April – probably right in the middle of the election campaign. Labour are also keen to emphasise that the fragility of the economic recovery makes it unwise to cut government borrowing by more than set out in last year’s Pre-Budget Report.
The Conservatives have stressed that they would take the health of the economy into account when deciding the scale of any spending cuts and tax increases to be included in the budget measures they hope to introduce within 50 days of winning a general election. But, as George Osborne made clear again in his Mais Lecture on 24 February, they would take steps to bring government borrowing down faster in 2010/11 than set out in the current Government’s plans. Whatever the economic rationale behind such a move, for this to seem like a sensible course of action the economy needs to be growing at something more than a snail’s pace.
So, while very low – or even zero – growth in the first quarter of 2010 would be bad news for Labour, it will be hard for the Conservatives to capitalise because it also throws into question one of their key economic policies. Perhaps the Liberal democrats would be the beneficiaries – not regarded as responsible for the recession and not advocates of early cuts in government borrowing.
Tony Dolphin, senior economist, ippr
The economy has been at the heart of the general election campaign. Gordon Brown emphasises the need to support jobs and denounces Conservative plans to cut public spending by £6 billion this year as risking tipping the economy back into recession. David Cameron extols the benefit of making a start on deficit reduction in 2010/11 so that national insurance contributions do not have to rise in April 2011. And Nick Clegg calls for an increase in the personal tax threshold to £10,000 as a demonstration of the ‘fairness’ that is needed if the public are going to support tough measures on reducing the fiscal deficit.
