The political conference season revealed a great deal about what the parties think about the financial crisis and the economy. For Labour, it was a time to show how it intends to build on the bold actions of the past year to manage the economy successfully in the years ahead. For the Conservatives, their conference was a week of truth. Vulnerable to charges of a lack of experience and maturity on the economic front, they had an opportunity to prove the critics wrong. They were unable to do so. In fact, their economics was sacrificed to their ideology.
The past couple of years – and particularly the past year – have been testing for political leaders. The financial crisis demolished old certainties and also revealed the power relationships that had been at work in the global economy. The world had been in thrall to parts of the financial sector which were engaging in “casino banking” activities that few questioned. When it all went wrong, even our ability to make simple financial transactions was put at risk. Leadership required bold action and quick decisions. Even as their bailouts were being discussed last year, some executives of British banks appeared not to realise how bad things could get. They believed all they faced was a liquidity problem.
As so often in markets, when you are in trouble, you cannot rely on the market to give you a break. The Government led the way by forcing a rescue. With that action, with the economic stimulus package announced a year ago and with its work for international action, Labour effectively saved this country from a depression.
The Conservatives had a bad year as far as economic policy was concerned. David Cameron and George Osborne shifted position constantly, looking for the political advantage when the country was focused on the national interest. Bank nationalisation was opposed and then supported. Little attempt was made to show they understood what had happened or had any original ideas what to do about it. We might feel media scrutiny was lacking, but the Tories were outflanked by Labour’s actions and also by Liberal Democrat analysis.
Osborne’s Tory speech at the Tory Party conference was a chance to bolster his credibility, lacking even in the City. As far as policy was concerned, the Shadow Chancellor did finally produce some proposals. Some of these were even structural in nature, such as accelerating the extension of retirement ages – an idea hastily amended on the day when he realised that women can retire earlier than men at present. Osborne repeated his mantra that public spending is too high and should be cut. From their leader down, the Tories have been adamant that debt has been allowed to rise too far.
The Conservatives’ lack of economic understanding was acutely illustrated by Cameron in his conference speech. Asking: “Why is our economy broken?” his answer was: “Because government got too big, spent too much and doubled the national debt”. He conveniently forgot that, until recently, he was pledged to implement Labour’s spending plans if he won office.
Even more concerning is that he was saying the recession we face along with the rest of the world is the fault of government spending and borrowing. In fact, the spending Cameron criticises is helping to keep our economy out of depression. The jump in the national debt was the right response when private sector confidence had dropped so low.
If we followed Conservative policies, we would cut government spending now and not permit government debt to rise to the levels predicted in the Budget. Businesses and consumers were already reining in their spending last year. Under Conservative philosophy, they would have been hit further with no hope offered by government. That approach was tried in the 1930s. It resulted in disaster.
The danger now is not over. If government spending is cut or taxes are raised too soon, we risk setting back the recovery. When a government considers the national debt, the choices facing it are not the artificial choices Cameron outlined to his supporters. In his conference speech, the Tory leader did not mention in that it the banks are responsible for getting the world into this mess. Also missing from his speech was any reference to growth.
Of course, we will not default on our debt. But the choice is not between cutting the debt now or letting it get out of control and leaving the job to hyperinflation. Properly managed, we can tackle the debt as growth improves. Gordon Brown made that point recently when, addressing an audience in the City of London, he argued that the correct approach is “the pursuit of growth, in the context of a debt reduction plan, with an export-led strategy” based on investment in skills and infrastructure. In dealing with the banks, the Prime Minister said the Government had taken unusual measures. With regard to the recession, he added: “We have had to be bold and unorthodox again”.
There are clear differences between the parties. The Conservatives seem to want to relive the early 1980s, but they ignore the fact that we do not have an inflation problem at present. The aggressive attitude to the budget deficit implies a rather pessimistic view of the British economy. There is little hope in their message.
Labour has aligned itself closer to emphasising growth and investment, in the spirit of John Maynard Keynes. This is the right approach, as long as the markets are convinced that debt will not run out of control. The deficit reduction plan is designed to give markets confidence. Hard spending choices still remain, especially if investment is to be protected. And there is still a struggle to be had against the conventional wisdom which wants debt cut as soon as possible.
Yet Labour is developing a message on the economy which is not only credible, but which speaks of hope in our ability to emerge stronger from this recession.
This article was published in Tribune (23 October 09).