In the New Year issue of Tribune, I look at the prospects for the economy and what Labour should do about economic policy:
What is Labour’s economic policy? What does it mean to the average voter? These are vital questions and will become more so in the months ahead.
The banking crisis of the past few months was unexpected and impacted the global economy. In these times, we need to do more to explain our approach to people. The UK economy has experienced over 60 consecutive quarters of growth, so our track record is impressive. We need to ensure economic policy remains sound because the economic conditions in the months ahead may be difficult. This is the main challenge in 2008 not just for the Government but for the whole Labour Party.
A difficult few months
Economic historians will count themselves blessed by 2007 since it has provided a rich seam of economic events which will bring forth books and papers for years to come. Few realised in July last year that a credit crunch was beginning in the United States. The Northern Rock problems have come to epitomise the banking crisis (and the authorities’ response), which has required large global investment banks to take losses and seek new funding. The rates at which financial institutions lend to each other rose to extraordinary levels above central bank interest rates, making borrowing more expensive and acting as a brake on economic growth. This required central banks to cut their rates. Markets in some financial securities ceased to function.
While the credit crisis was unfolding, the government published its Pre Budget Report to a mixed reception, with measures to reform the capital gains tax regime and new proposals on inheritance tax and the taxation of non-UK residents. The overall theme of the new Comprehensive Spending Review was obscured by election fever. Meanwhile the Tories felt renewed confidence with a boost in the polls and better reception from business.
It could get worse before it gets better
If the past three months felt tough for Labour Party members, the economic indications are such that it could get worse before it gets better. As with the Asian financial crisis in 1997/8, the economic impact is taking a while to become apparent. There are signs the credit crunch is affecting the wider economy. Companies that need to borrow to invest are already finding costs higher. In the corporate and the consumer sectors, banks are tightening lending conditions. The US manufacturing sector appears to be expecting a slowdown and employment data issued last week was not encouraging. In the UK, house prices have fallen slightly for the past couple of months (the fall in house prices in the early 1990s did not happen in one or two big drops but through small price falls month on month). Some high street retailers such as Currys and Land of Leather did not have a great Christmas and retailers’ outlook statements have been bleak, indicating consumers maybe feeling under pressure.
Overall, economists are still revising down GDP growth rates for the UK and the US. Growth in the UK is expected to be 1.8-2.0% in 2008, down from 3.3% in 2007. While employment has remained robust it usually lags any slowdown in growth. Retrenchment in the financial sector could have a significant impact since it has represented a large proportion of recently created jobs.
Public spending may not be able to help
In the last period of slowing growth, after the dotcom boom spectacularly bust, the increase in government spending after the 2001 election was able to help compensate for a slowing private sector. In 2008 we face tight constraints on public spending since government borrowing continues to be higher than expected and the battle against inflation continues to be waged. Public sector pay rounds may continue to fall short of some expectations. At the same time the growing public pressure to demonstrate wise spending of taxpayers’ money on public services such as health and education will intensify.
We face a challenge on the Left
The Left will face a key challenge. For too long, discussions about economic policy have been based on the politics of prosperity. We have taken for granted, without asking too many questions, that the economic cake is getting bigger and we have all had our own ideas about how to slice it. Economic debates at Labour conferences usually focus on putting more pressure on business, and more pressure on the government to spend more with little attention paid to the trade-offs required. Pamphlets and declarations do not properly address how to maintain our country’s prosperity so we can afford to pay for the social justice we demand.
Of course Labour should promote responsible business. Social investment and redistribution are important. But to remain relevant to the times, we need also to focus on encouraging enterprise and increasing productivity. Voters are looking to Labour, not just for measures to improve working conditions, but to ensure they remain in work.
It's not all doom and gloom
It is important not to become too pessimistic. A morbid spirit is just as infectious as the current stomach bug doing the rounds. Many City analysts have succumbed and yet economists, goes the well-used quote, have predicted nine of the last five recessions. In fact the balance of opinion is that the UK will avoid a recession this year. Moreover, we begin 2008 with low inflation and falling interest rates. Even the current weakness in the pound may stimulate exporters and help rebalance the economy.
We need to keep talking
Labour does need to keep talking about its economic policy, building on recent statements and restating the progressive case for low inflation, low interest rates and freer trade. The Government’s objective, according to the Pre Budget Report last year, ‘is to build a strong economy and a fair society, in which there is opportunity and security for all.’ The record of sustained economic growth and low inflation has been achieved by the Government’s ‘…macroeconomic framework and promotion of flexible and open labour, product, and capital markets…’ In his New Year message, the Prime Minister referred to the global credit crisis and said ‘…just as we withstood the Asia crisis, the American recession, the end of the IT bubble and the trebling of oil prices and continued to grow, Britain will meet and master this new challenge by our determination to maintain stability and low inflation.’ The right decisions will be made ‘…to safeguard and strengthen our economy – and by keeping inflation low, keep interest rates for business and homeowners low.’ No risks will be taken with stability, the Prime Minister said, since on that depends ‘family prosperity and our capacity to build the good society'.
Labour ministers, MPs, councillors, and candidates should make a New Year’s resolution to link these themes constantly to the experience of voters. Economic crises come and go. Economic credibility will stay if we show we understand the challenges people face and demonstrate we have the answers for the future. Overall, that requires clear and prudent economic policy together with the right infrastructure investment for long term growth. The opposition parties have no credible alternative policies and should no longer be allowed an easy ride. We must get the politics of economic policy right, short term and long term. Otherwise, we will face the prospect of having the right policies but losing the public’s support.
If we meet this challenge, we will look back on 2008 as the year we sowed seeds of confident optimism, both economic and political.