This is the first in a series of posts on the main Liberal Democrat challenges for 2011 we’re running over the festive season. You can find all the posts as they appear here.
The state of the economy is central to the fate of the Liberal Democrats, both because it is so important in shaping people’s perceptions of the government and also because the better the economy does the more scope there is to get public interest in Liberal Democrat achievements in other areas. No matter how wonderful the government’s green achievements, for example, they would get very little attention in the midst of a double-dip recession.
Three figures are likely to sum up the economy’s state over the next 12 months. First, the quarterly GDP growth figures. These figures are given far more media attention and political weight than their accuracy – or rather inaccuracy – deserves as the final figures which come out months after the initial estimates are often significantly different. However, whilst preliminary figures of +0.1 and -0.1 might sensibly be judged to be little different given the errors in such numbers, the political and media impact of even such a small difference would be huge.
Second, the deficit figures. Despite the sizeable gap between the latest deficit figures and most people’s own day-to-day circumstances, it has become the dominant political explanation for the government’s actions – and the coalition has won the political battle to persuade the public that major action was required to bring it down. But to have a chance of political credit as the reality of such action bites, overall deficit reduction has to be seen to be happening.
Third, real wages growth (or not). Weak real wages growth has often been the explanation as to why a government doing well on other economic indicators has still lagged in popularity. Likewise, strong real wages growth has often lifted government popularity despite other political troubles. Real wages are generally forecast to fall over the next year; slowing down and then reversing that decline will be vital for the public to feel that the government’s economic policies are working.
With a Conservative as Chancellor, Liberal Democrat influence on the economic out-turn will mostly be through Danny Alexander’s work to control the details of public spending, and so keep deficit reduction on course, and on Vince Cable’s work to boost growth and investment.
However, this is an issue on which both Conservatives and Liberal Democrats will sink or swim together as the impact of the contributions from the different parts of the coalition will be so closely entwined.
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23 Comments
Thank heavens for an article that recognises its the economy which carries the most importance, and not the budget deficit, which many people have erroneously stated.
Employment should feature in any assessment and more significantly unemployment , since this represents inefficiency in the economy – lost production of goods and services. The larger chunk of waste we carry, the longer it will take for the economy to recover.
There are also structural problems in the economy that need to be put right. If the banks are not radically restructured then there is a danger of a new bubble and we know what that leads to.
I make the point because Nick Clegg and Vince Cable made it clear before May 7th about what needed to be done, but I am not clear whether the restructuring they proposed is going to happen and if it is then when?
I was hoping that Vince Cable would drive this, but there is a question about how much power he has to do so.
Despite the world economic crisis, we were constantly told by this government that it was Labours fault. Similarly if things don’t improve by the next election, it will be the ConDems fault. It does not pay to lie. Those words will come back to bite you.
All good points but there are two other important factors and they are linked together, Inflation and Interest rates. One of the reasons why this recession has been unusual is that many people in work have been much better off as a result of the very low interest and mortgage rates.If interest rates rise they will suffer a drop in disposable income which could be very bad for the Coalition.
The most likely reason for interest rates to go up is that inflation starts to rise and the bank of england raises interst rates to control it. Given the vast creation of money through QE it is not surpising that inflation is already rising rapidly.
The plus side of rising interst rates is of course that savers income will increase but that not may counteract the adverse effects elsewhere.
Simon McGrath got there before me. But can I add some other points of interest that need to be considered to his list?
House Prices – still tumbling, still a slow down in purchases.
Rising unemployment – The Coalition is still briefing that private sector jobs are on the rise. This was proved untrue in last month’s figures, hidden by the sudden increase in unemployment
Stalling exports – The main foundation of the Coalition’s economic strategy – and not rising at the speed the economy needs
Currency devaluation – Yes the pound is falling – but nowhere near enough to compensate for the fall in export demand
Falling Retail sales – This winter will hurt this Quarter. Plus, the VAT rise is expected to have a dramatic effect.
In reality – we have somewhat of a perfect economic storm on the way unfortunately. That the Lib Dems in the shape of Alexander have been positioned so centrally to this will not help if Osborne has no Plan B.
Isn’t the key point when we realise that these issues are less important for the junior party in a coalition than for the main coalition party or the opposition. This is not a particularly significant Lib Dem challenge for 2011. You see, to turn an argument around, we did not win the election and so we are not the most important part of the government…
Voters will surely ask – have they been shown a party that fights for their interests and knows what it is and knows the people it seeks to represent. This is a democracy and backing the interests of your voters is a good thing.
Were our voters helped by backing down on our argument that the structural deficit did not need to be dealt with in 4 years? Will they be particularly affected by the government’s proposed job cuts?
@ David Lawson
No, you didn’t “win” the election…. but you are acting as enablers for the Tories so they can implement their regressive platform, with a few scraps tossed your way so you can use them as a fig leaf to keep your membership from knifing Clegg and his cabal in the back at the first opportunity.
You are right about one thing: voters WILL ask if they have been shown a party which fights for their interests, knows what it is, and knows the people it seeks to represent. For many of us who previously supported the LD’s, the answers to all of those questions in the case of the LD’s is “Hell No!”.
Many of us do not believe that the structural deficit needed to be reduced so fast, or by making the cuts proposed. Many of us WILL be directly affected by proposed job cuts, or will live in fear that it might happen.
In the meantime many of us are in despair that a party we actually believed was different, which stood for something progressive and radical is effectively being “pimped” by the Tories. You are being used as a lightning rod to cover the introduction of many Tory policies you don’t actually believe in, and seem to be sleep walking towards disaster with a blithe hope that people have short memories and will have forgotten what you have allowed to happen by 2015.
What you should actually be worrying about is how many people like me, who always voted LD, will continue to do so. Absent a radical change in your direction, the answer is likely to be that huge numbers will not.
The challenges are numerous. Top of the pile is how to slow (or preferably stop) Andrew Lansley’s mad health reforms…
… the anger from students will also get worse, not better. Today a 9% cut for universities in one year has been announced (cleverly spun as 6%), with the bigger cut (11%) for the fund to provide financial support for the poorest.
http://etonmess.blogspot.com/2010/12/universities-receive-9-funding-cut-from.html
What may seem like a small percentage change in GDP, is in fact no small change. 0.1% of GDP is £1.5bn.
The coalition is trying to cut the budget deficit of £150 billion by spending cuts in funding for universities, local authorities, housing benefit and raising VAT from 17.5% to 20%. And yet the biggest single and most effective policy they could pursue is to get the tax-avoiders to pay their taxes – as agreed by parliament.
An estimated £42 billion is dodged every year. Not only would it help the budget deficit, it would also help the economy, since the majority of this money goes offshore.
They’ve said if they spend £0.9 billion on tax evasion/avoidance, it will produce £7 billion. That’s a fantastic return for a modest investment.
But what about the rest?
“It’s the economy, stupid”.
Translation: People care about the economy, in a way that is determinedly stupid. In a boom, President D. Duck would be acclaimed as an economic genius. In a bust, President Einstein would be called a moron.
Nobody is going to want to do anything so subtle as to distinguish betwen the two coalition partners when it comes to judging our economic performance. To coin another silly phrase, we are both in this together!
“RichardSM”
Quite right about tax dodging!
Consider the luxury expenditure of giving and bequeathing great fortunes of capital. Why does so much of that dodge taxes – legally – when ordinary expenditure by the poorest is about to be taxed at 20 per cent VAT?
Consider the luxury receipt of great fortunes of cumulative unearned capital from lifetime gifts and inheritance? Why does so much of that dodge taxes – legally – when earned income is taxed at up to 50 per cent and capital gains are taxed at 18 per cent?
Consider all those who never receive any gifted or inherited capital! In our capitalist democracy, if fortunes given and received were taxed instead of being legally dodged, there could be not only Universal Suffrage – votes for all – but also Universal Inheritance for all UK-born UK citizens – capital for all – of at least £10,000 (less than ten per cent of average wealth of every adult and child in the UK). What a way to help pay for tuition fees and enable other opportunities for others!
Liberals should be in the vanguard of creating such a Popular Capitalist, truly big society, thereby putting clear water between themselves and traditional Dynastic Capitalist conservatives, for whom the Big Society is partly a sop. We are not “all in it together”, when the Chancellor of the Exchequer and many others inherit vast fortunes and others inherit nothing.
PS All UK-born UK citizens at the age of 25.
David Allen
Is that right? It is obviously the conventional view (not meant as a dig) and time will tell. Clearly if the economy goes downwards Labour will gain relative to Tories and Lib Dems but that may not be split evenly. The voters know that the overall economic direction is set by the Tories and there is (and will be throughout) a Tory at the Treasury which will associate the Tories with the economic management – just as Vince and Nick led the way on tuition fees. There is an assumption that we are in government and so have to rush around looking and sounding ministerial. I am not sure that assumption is right – at least that it is as right for us as for the Tories. The voters expected us to stand up for their interests and our key commitments. We have blown that big time in one area. Having people willing to appear on TV and radio and prattle on about “fiscal responsibility”, PSBRs, inward investment – even neo-classical endogenous growth theory as Brown did – is not going to persuade anyone over to us.
Perhaps Vince will redeem himself with some structural economic changes which the details of his dept’s work seem to hint at – and perhaps the civil servants will stuff it with their learned mantra against state interference in the market. The speed and virulence with which 80s ghosts rose up to attack our view of the Cadburys take over was remarkable – Vince would do us a favour by stopping that loss of work, tax income (they have moved off shore I think) and investment. Let’s see.
@David Lawson
“these issues are less important for the junior party in a coalition than for the main coalition party or the opposition”
I think you’re wrong for 5 main reasons.
1. If the economy does not turn around, the Tories will claim they were restricted from carrying out their policies in full by the Lib Dems and that if they had been given free reign they would have resolved the problem.
2. If the economy does improve, the Tories will claim that it was their policies that were followed. This will be backed up by comparing what the Lib dems had in their manifesto against the actual course followed. At best the Lib Dems get no credit.
3. If interest rates rise (and they probably will if inflation continues to creep up), normal people will be drastically affected. This will be exacerbated by falling house prices and real terms wage cuts.
4. Those in the public sector who will have lost their jobs will see Alexander as the hatchet man as much as Osbourne.
5. Clegg and his fellow Ministers have been at pains to state that they fully endorse the policies being carried out, and that they are the “only way” to fix the economy. The Tories are less clear on this issue with Osbourne in particular making a number of more partisan noises.
All of these are, I believe, largely a result of the tone of the coalition. The great love in approach adopted by Clegg will allow the Tories to harm the Lib Dems whatever the economy does, but particulalry badly if it fails.
The argument about the speed of cuts will alter as time goes by. Macro economically, If deflation rears its ugly head, the cuts will be slowed down. If Inflation settles in, the speed of cuts would have been about right.
I suppose it is natural, allthough disappointing, that comments here relate mainly to the party advantage or disadvantage of the LibDems of what happens to the economy, rather than anything novel or distinctively liberal about it.
UK Universal Inheritance, introduced gradually, would boost spending without increasing the deficit.
@David Lawson
“Perhaps Vince will redeem himself”
Which Vince is that ?
a) The Vince that is totally on board with all Government policy OR
b) The Vince that tells Telegraph reporters posing as constituents that the Government is in danger of “getting out of control”, then backtracks on said comments…
Will the real Vince Cable please stand up…..
By the time he decides to stand up for the principles he was elected for he will have zero credibility left.
@Mark Park
Thanks for a thoughtful article on the political implications of the economy.
As others have noted, you leave out unemployment. The saddest thing about that is you may be entirely wrong. I remember, when canvassing in the 80’s, that when voters weren’t worried about losing *their* jobs, they’d voice concerns about unemployment, but it dodn’t seem to change their voting behaviour. And turnout among the long-term unemployed is low.
At the moment, voters are worried about their jobs, hence the willingness to exercise pay restraint. But as the economy recovers, and as the pay freeze is combined with inflation, that will probably change.
I fear that, in a year’s time, the political pressure from unions and from key groups of voters will be for increased wages, even if these lead to recruitment freezes, and higher unemployment. While high unemployment is an issue, this is something we need to resist.
@Steve Way
“If the economy does improve, the Tories will claim that it was their policies that were followed. This will be backed up by comparing what the Lib dems had in their manifesto against the actual course followed. At best the Lib Dems get no credit.”
I’m not sure the Tories would be able to do that. Contrary to what a lot of people say, neither the Tory nor the Lib Dem manifesto was particularly explicit about the deficit reduction programme they’d adopt. The IFS made some guesses, but they were only guesses, because, for political reasons, both parties were a little vague about their plans.
Re. Lib Dem unequivocal support for everything the coalition does, I have some sympathy for what you say. I think we need to do more to present ourselves as pressing the Tories to be more compassionate. By, for example, pressing hard to reverse the policy on 10% cuts in housing benefit for the long-term unemployed.
We need to keep the cohesion of the coalition, so this will be difficult, and so needs to be done carefully. I think Tim Farron may help here, because he is not bound by joint cabinet responsibility. Doing this may mean allowing the Tories to present themselves as having a stronger emphasis on the economy, but even if so, it’d be worth it.
A great outcome for the Lib Dems for 2015 would be if we can present ourselves as the only party which is both fiscally responsible and with a commitment to social justice. If we could carry it off, I think most Brits would strongly identify with it.
Cameron has always wanted to present the Conservatives that way, but I don’t think it’ll ring true with the British public. There are too many Tories who care nothing for social justice, and Cameron will never be able to fully marginalise that wing of his party.
And Labour have seriously undermined their credibility as a party of financial prudence.
Currently, we’re undermining our long-standing reputation for compassion, and I think our leadership need to try to correct that, by publicly emphasising our support for the more progressive elements of the coalition programme.
This also has the merit of being true. I’m sure these are the policies we’ve been fighting for behind closed doors.
But it’s easy for me to say it. It’ll be fiendishly difficult to achieve in whilst still making the coalition work.
@Dane Clouston
“disappointing, that comments here relate mainly to the party advantage or disadvantage”
To be fair, there’s been a lot of threads on these issues that aren’t about political advantage. This one explicitly is.about political challenges for the Lib Dems.
Sorry, typo in second paragraph above. Should read:
“The saddest thing about that is you may not be entirely wrong”
George Kendall,
“The LIberal Democrat challenges for 2011: the economy” led me to hope for more about overall economic philosophy and policy and less about the effect purely on the party of the evolution of the economy. But I take your point.
“Fiscally responsible and with a commitment to social justice” would be good. But given the involvement with the Conservatives in the Coalition, that commitment to social justice has to be far deeper, more obvious and more populist than before it is to mean anything to voters.
Social justice ought to mean VAT on expenditure on private health and education in order to improve state provision and positive redistribution of wealth at the point of transfer from each generation to the next. If not that, then / “What’s new, Pussy Cat?”.
It really has to be seen to be believed:
“Cabinet minister Vince Cable has said he is “embarrassed” by comments made privately suggesting he could walk out of the coalition.
The business secretary told undercover reporters from the Daily Telegraph he could “bring the government down” if they “push me too far”.”
http://www.bbc.co.uk/news/uk-politics-12045792
Who would have guessed from any of that that Vince Cable wasn’t the leader of the Lib Dems?
Such fun!!
“Nobody is going to want to do anything so subtle as to distinguish betwen the two coalition partners when it comes to judging our economic performance.”
The polls say otherwise.
We’ll see soon enough in May just how pointless it will be waiting years for crumbs of public approval trickling down from Cameron and Osborne’s Party that will never come
The Conservatives get any credit while the Liberal Democrats get all the blame.
You don’t need to like it but it’s painfully obvious that’s how it’s going to be.
The VAT rises come in soon and all the talk about cuts will soon become actuall unemployment and on the ground council cuts. That shock to the economy will not be helped by the Euro crisis or continuing worries about the banks toxic assets.
The die was cast when Nick agreed to Osborne’s Thatcherite ‘cut as hard and fast as possible’ agenda. Nick agreed to the ratio of cuts to tax tises and the speed of the cuts so he’s every bit as culpable for the Thatcherite economic policy as he was for student fees.
Though it’s clear not every Liberal Democrat is as happy with Cameron as Nick is since today’s massive (but ignored here of course) News that Vince has admitted that some Liberal Democrats are having constant rows with the Conservatives and Vince says he could resign and bring the government down.
The second most important Liberal Democrat Minister threatening to bring down the coalition government is minor stuff I know, but you never know, some people might be interested in such trivia. 😉
Still to come. A roundup of our reminders of all the news still to come so far. All that still to come. But first. Coming up.
“In the coming days, The Daily Telegraph will expose further concerns among Lib Dem ministers about Coalition policy and senior Conservative figures.”
http://www.telegraph.co.uk/news/newstopics/politics/liberaldemocrats/8215462/Vince-Cable-I-could-bring-down-the-Government.html