The Liberal Democrat challenges for 2011: the economy

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.

Budget 2010 photocallSecond, 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.

  • 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.

  • Simon McGrath 20th Dec '10 - 1:26pm

    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.

  • David Lawson 20th Dec '10 - 2:05pm

    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.

  • 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?

  • David Allen 20th Dec '10 - 3:44pm

    “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!

  • David Lawson 20th Dec '10 - 8:09pm

    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.

  • @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.

  • Man on the Bus 21st Dec '10 - 12:34am

    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. 😉

  • Man on the Bus 21st Dec '10 - 12:55am

    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

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