Economic troubles
I’m not an economist so won’t pretend to understand the possible implications of the credit crunch that forced the Northern Rock to go cap in hand to the Bank of England yesterday. If the economy does hit troubled times, is it likely to help or hinder Gordon Brown?
Populus’s party conference poll for the Times will, as usual, be released in dribs and drabs over the conference season. Today has the results of a question that asked whether people “If Britain’s economy were to face problems in the months or years ahead, who would you most trust to deal with it in the best interests of Britain?” Gordon Brown and Alistair Darling were overwhelmingly chosen over David Cameron and George Osborne, by a ratio of 61% to 27%. This should hardly come as a shock given the perceptions of Brown and Cameron that are consistently revealed by polls - Brown is seen as strong, competent and experienced while Cameron is seen as caring, likeable and modern. It shouldn’t be a surprise that people would prefer a strong and experienced hand at the tiller in an economic crisis.
The converse of this is that, were there to be economic downturn it may itself damage Brown’s reputation for economic competence. In 1991 the Conservatives enjoyed healthy leads when asked which party people most trusted to manage the economy, but it was rapidly reversed after Black Wednesday. The present troubles in the credit market are nothing to do with Labour’s handling of the economy, but that doesn’t mean it wouldn’t reflect very badly on Brown if the economy soured on his watch. We’ve seen with the hypothetical polls from before Brown became Prime Minister that people aren’t actually very good at predicting how they would react to events in the future. In reality we cannot tell if, faced with economic troubles, people would turn to Gordon Brown…or blame him.
Filed under: Populus
The challenge for the New Conservative Party is to convince the electorate that Brownism is bad for the economy. They had won all the economic arguments of the eighties, trounced the unions, lowered income tax and were only beaten when New Labour managed to convince us that “Boom and Bust” economics had failed. “Prudence” held sway, and interest rate policy was removed from the armoury of the government and handed to an independent committee. Cameron’s attempts to innovate with tax policy will not be any where near as effective as pointing at Brown’s failures. New Labour has not (yet) lost its argument over “Prudence”, and Cameron hasn’t yet shifted the voter’s focus to an argument that he can win. I believe the polls will change when Brown can be proved responsible for a recession, or even a “blip”, but not before.
” The present troubles in the credit market are nothing to do with Labour’s handling of the economy”
Sorry Anthony, I don’t agree.
At the root of the US problem is uncontrolled consumer debt and a decade long housing boom, which no American politician addressed because, “The Home Owner was King”.
No one dared raise tax on property or risk higher interest rates to slow housing price growth because dampening consumer (debt) driven economic growth would be a vote loser.
If there is a credit crunch then the Chancellor who’s policies have gone hand in hand with personal debt now being higher than GDP, will almost certainly bare a large share of the blame.
For all the talk of “No More Boom and Bust” Brown has presided over a decade of debt driven growth and no matter how long his boom has lasted it is ultimately unsustainable to build the economy on personal borrowing beyond our means.
I know that this Blog isn’t for political attacks but there are a large number of economic commentators who have for some time been pointing out the similiarities and dangers in the UK following the US consumer spending route to growth based on equity release from over valued assets.
For all Browns talk of “Balanced Finances” and “Prudence”, he has reaped the tax receipt benefits of a consumer boom he has done nothing to stop and when it comes to a halt he should be held to account for his part in not restraining it.
Peter.
It looks suspiciously like there was a run on Northern Rock today.Can’t be good news for Brown. In fairness Cameron probably didn’t notice.Normally a steep devaluation is fatal for any government ( Wilson 1967/ Callaghan 1976 / Major 1992). Interesting comment from Mr Darling
- variously interpreted as he’s not too bright / not exactly 100% agreeing with his predecessors policies.
Ok - they might have something in common, I meant only that at present we are seeing right now have been triggered as the knock-on effect of problems in the USA. How that effects the British economy obviously would to a greater or lesser extent be down to what Labour do now, and did for the last 10 years. My point is that, even if it’s nothing to do with Brown or Labour, it could still do real damage to his reputation. If it is all his fault, then it goes without saying it could damage his reputation!
Although Cllr Cairns makes a respectable point (not an attack in my view) with regard to reliance on cheap uncontrolled consumer credit as a driver (though the idea of Brown “baring” anything is more than my imagination can bear!), he cannot make his point without supporting mine. The argument has not yet been won. “A decade of debt-driven growth” is still a decade of growth, and the polls won’t shift dramatically until Arecession occurs AND the opposition manages to pin the blame on him.
It seems a long time since the state of the economy was an electoral issue, but if this is a taste of what’s to come, then it may well be again.
Going back to 1992-3 for a similar scenario, many people thought that the Conservatives had the answer to the then current economic troubles and hence won the 1992 election.
Suddenly it became clear that this wasn’t the case, and the Conservatives have suffered ever since. It could well be that this happens again.
I have to agree with everything Peter Cairns said and want to add some more things, as to why Brown can be viewed as (at least partially) responsible were things to turn sour.
1: The unprecedented rise is consumer debt has accompanied his taxes on savings (esp. private pensions) and proliferation of means testing, which has created tax encouragements to borrow rather than save.
2: Housing multiplier of cost:income is at one of the highest levels ever and government did nothing to discourage this despite countless warnings and possibilities to intervene.
Most importantly for me which Peter didn’t mention
3: Pretence of ‘prudence’ and expansion of government debt, contrary to counter-cyclical government accounts.
What I mean by this is that the government for years now has run deficits in the tens of billions, despite being in a booming economy, with as the Chancellor likes to say “unprecedented period of economic growth”, there has been absolutely no “prudence” since 2001. Given all this economic growth, the Treasury should have been running surpluses for years, paying down debts so that when things turned sour (as they inevitably would), the government could both absorb its loss of taxes and even make a counter-cyclical injection of extra cash into the economy, as happened in 2001.
After all the growth and bumper years of tax revenues, the Treasury ‘war chest’ should be full, instead its empty spent during the boom years. Even in boom time we are running deficits in the tens of billions: If the financial market (worth upto 25% of London’s value added) turns sour then government could lose billions or even tens of billions more of tax revenue. The deficit could blow wide open and there will be little option of either increased spending or providing tax cuts when the economy needs it most.
I find myself agreeing with virtually all the above comments - it has taken longer than i thought for a real world crisis on the financial markets to affect the British economy - but finally we will see if all the credit given to Brown for the economy he inherited from the last Conservative government can be saved by him now that it’s not going to be plain sailing and all the revenues he could have used to bolster the economy have been squandered . If it does go all paer shaped i’m sure he will not blame himself - perhaps the new chancellor ??
Let’s hope the world bank don’t ask for their loans back from Britain - the same sort of loans that Brown attacked the Conservatives for in 1997 - then paid off - then accrued an even bigger debt to the IMF himself .
It’s Browns handling of the economy that has hurt and confused the conservative part so much.The usual Labour half baked approach of it hasn’t materialised, and in the polls throughout the Labour term,they have seen to have been managing it well.This is despite the conservatives repeatedly telling us that there is an economic downturn around the corner.They even said in the commons a few years ago that we were about to enter a recession.You would think they would have got that right.Recessions are something they are experts at.
Seem ironic that the conservatives and their supporters are pinning their electoral hopes on an economic downturn for the country.
Then again,who said,if it isn’t hurting….?
Don’t forget that in 1997 everyone was saying that we were heading for a recession, all this rubbish about the Conservatives leaving Labour a great economy is just not true. We have now had the longest period of growth ever and these blips (caused by the USA giving loans to those who could not afford them and our banks taking on the debt from the USA). Labour always come out tops on the economy and it would take a recession (like the couple we had under the Tories) to stop that. Lets not forget that while the Tories were in power we were the first to go into recession and the last to come out, while under abour we have missed the recessions, I go to the USA regularly and several times whilst there I have been asked how the recession has effected the UK and I always answer “What recession?”
P.S. When is the next big poll out?
The problem with the idea of us missing recession, is that where as the general public and some here see it as success, the issue for me and others is how we avoided it.
There are two schools of thought.
The first, which is very much the government line is that we have done it by skillful handling of the economy, and the second (which I favour) is that we have avoided recession by allowing the public to over utilies equity release and cheap credit to maintain the consumer (and services) boom on the back of hughly increased personal debt.
Two events make me fel that I am right. The first is what has been termed “Goldspans Balloon”.
When he was the head of the US Federal Reserve at the time of the DotCom boom, Goldspan tried to talk down the markets as he believed (rightly) that stocks were over valued and that the inflationary pressures and risks involved in over rated stocks and cheap credit were a danger to the US economy.
In effect, if we don’t turn off the heat the balloon will rip and we will fall from the sky.
The markets ignored him and the risks came home to roost and the economy faltered when the bubble burst, which resulted in the Fed cutting interest rates to prevent recession and a run on the markets.
When the Ballon Burst because it was to hot and started to fall, they turned up the heat.
Reducing interest rates did work it kept the economy going, but it did so by perpetuating cheap credit and growing debt, and bailing out those who had taken out large debt to speculate and high risk.
Now lets fast forward to the Sub Prime crisis today and we see the same thing.
To much borrowing to buy property on the back of ever inflating prices and a disregard for the level of risk. The bubble bursts and what does the fed do… It cuts interest rates to keep the consumer spending and effectively to rescue those who have been gambling on high risk debt netting them big returns.
So now lets look at the UK economy.
Over Browns tenure at No11 we have seen a decade long consumer boom based on low interest rates, rising property prices and growing personal debt.
To the general public it looks like a good thing, there has been no recession, but at some point it has to stop.
House prices can’t keep rising if first time buyers are in there forties and there aren’t enough of them. With a credit crunch in the banking centre individuals ability to keep borrowing will soon be affected.
If the economy slows and tax receipts fall, then the government will have real problems.
Whats more if it hits the city badly, seeing invisible earnings drop and the pound drops too, particularly with regard to China, we will very quickly see just how our strong currency has masked a terrible balance of payments position.
Much of the tax revenues that the credit boom has brought have gone in to the NHS and schools, but these haven’t improved the nations productivity or trade position. In the 90’s the fastest growing job in the UK was hairdressing, a fairly blatant example of where the money was being spent.
If the consumer stops spending then we could be in a real mess very quickly, and that will be in no small part down to a government that has allowed the UK economy, and the City of London, to mirror much of the worst aspects of the US economy and Neocon economics.
When will the cruch come, I honestly can’t say, but it will come sonner or later, and the later it is I think the worse it will be.
Peter.
May we please get back to reflections on opinion polling and save political opinionating for other websites? There are plenty of perfectly sustainable opinions on economics, but the substance of Anthony Wells article was to do with the effects on the polls of a (possibly near) future economic downturn. The first UK economic recession for over a decade? My belief is that Brown/Darling (or is that “Darling Brown?) will be given a chance to steady the ship, but Cameron’s performance when news breaks of a recession (is that two consecutive quarters of negative growth?) will determine what happens to the polls. Before that happens the “this will never last” argument against Brown just doesn’t wash, and neither does the “Brown has reaped the benefits of a Tory Golden Legacy”. Kenneth Clarke led the Tory line in 1998-1999 in claiming that he himself would not have stuck to Tory spending plans as rigidly as Brown did.
John T,
Fair enough, on that line, a bit like the SNP at Holyrood, the best thing that Cameron could push is “time for a change”.
If there is a pronounced economic slow down or even a majority feeling that to use the YouGov question, “Financially things will get worse over the next Year” then I think the campaign could be a straight fight between.
Stick with a winning team when things get tough” v “It’s time to change, they are tired and have had there chance”.
Who wins will depend on, the public mood, the nature of the problems and who mounts the most effective campaign. We may get some indication of the latter when we see how the party conferences handle the Northern rock issue.
Peter.
P.S. I lost my cookies from my Powerbook so I posted under slightly different titles, just in case people though it was someone else playing tricks. Should be Okay now.
Just seen it on Teletext, latest YouGov:
LAB 39% (-3) / CON 34% (+2) / LDEM 15% (+1)
Changes on last month’s Sunday Times
The state of the economy is nowhere as strong as Brown makes out.
As the credit crunch begins to bite into household spending and the state of the property market - which it undoubtedly will with LIBOR running well ahead of base rate - we could easily see Q4 provide the first negative “growth” to leave the economy formally in recession next spring - rather awkward for a spring election !
What effect a recession has on voters will depend on how it is perceived. However, the key issue for fiscal policy is that because Brown has actually been quite profligate in recent years, there is no buffer to protect against a downturn, so we will see the fiscal deficit balloon. Then the state of our trade deficit will become more apparent. This has actually been appalling for years, kept hidden behind the invisble surplus (care of of the city whre things are not as good as they were) and by a lack of reporting of the quite dreadful statistics.
THe US ran twin deficits for years, and it laid the foundations for two recessions, and what promises to be an even more severe third.
The UK economy has been kept aloft by massive debt - both public and personal. When rates go up, the whole edifice will come down with a very big bump. How long will Brown be able to pretend none of it is his responsibility ?
Paul
Hi
Thanks Peter, I wonder what you think was the clinching factor in the SNP’s election victory - successful campaigning against Labour, promotion of SNP’s policies, or what? I have a feeling that ideology plays little part in swinging voter opinion, and the SNP’s continued popularity will depend entirely on its performance in office. Rather like Livingstone as mayor. Therefore (sorry to wander!) Cameron’s strategy should be less about flying kites of policy, less about defining “New Conservatism”, and more about softening Brown up for a big attack next spring, or the earliest date when a state of “recession” can be declared. Plenty of mud-slinging at the conferences.
From the Sunday Times Poll-
“Only 6% think the NHS has got “much” better in recent years, while 21% say it is slightly better. In contrast, 22% say it is slightly worse and 19% much worse. By 68% to 18% they say taxpayers have not got good value for the extra money”
Given this perception, is it not surprising the Conservatives do not talk a lot more about ‘WASTE’ and how the Government could be said to have increaced taxes a lot and spent a great deal, with a disproprotionatly low (or indeed negative, if this is to be believed) result.
Talking about waste/extravagance/profligate spending of tazpayr’s money are all traditional Tory lines, and they clearly carry large public support at present. But the Tories remain silent.
I think they say little on this subject out of dire fear of the ‘Tory Cuts’ counterattack they would be subjected to by Labour even for mentioning wasted money.
It seems to be the case that the public strongly believe extra money in services has been wasted, and yet are similtainiously adament they want the levels of spending to continue or to rise!
Lukw
Just like the sustained labour attacks on Maggie’s “spending cuts” in the 1980s. Sadly, Maggie never had the gall to actually cut spending once in 11 years. The attacks were based on the fact that public spending did not grow as fast as Labour under Callaghan & Healey had proposed. In teh mid - late 1980s, spending grew in real terms, but since the economy was growing faster still, public soending as a share of GDP continued to shrink, and this was used to justify continued attacks on “cuts” in public spending.
Given that history, is it any surprise Cameron dare not propose actual “cuts” in public spending notwithstanding the evident waste in todays “investments” ?
Paul
I think the public *might*- and I am not terribly optimisitc about the intelligence of the electorate - be able to understamd the difference between an actual cut and a relative cut.
Cameron’s policy of sharing the proceeds of economic gorwth between investment and tax cuts can also be attacked as a cut in relative terms. This logic is just so wanky I do think the Tories ought to trust the peopel to understand this. If they do, they can then cash in on the widespread perception that so much money has been wasted, which is surely a golden chance.