David Cameron has conjured up his very own “weather bomb”. The prime minister has warned that Labour’s economic policies hang over Britain like a brooding, blackening cloud. If we weren’t already sure that the 2015 General Election race was underway, then this week should leave us in no doubt.
More shadow boxing, and maybe even some policies, will emerge as we move into the new year, and much of the to-and-fro will centre on the fragile economic recovery. The outlines of the strategies from the three major parties are now apparent, but the interesting question is how effective these strategies will be. One interpretation of the data should give some succour to Labour leader Ed Miliband.
The Conservative strategy can be summed up by the phrase: “We made the hard choices and now the economy is recovering – don’t let Labour ruin it.” In contrast the Labour strategy is: “The recovery is taking place but it is for the few at the top rather than for voters in general – we will spread prosperity widely.” In the case of the Liberal Democrats it is: “We made the Tories help the poor as well as the rich – if you want fairness as well as competence vote for us.”
The chart below is very relevant for understanding these rival narratives. The data comes from the Essex Continuous Monitoring Survey, a monthly series of surveys of the British electorate. It shows responses to two questions relating to public attitudes to the economy. The first asks if the national economic situation has got better or worse over the previous year, and the second asks if the respondent’s own financial situation has got better or worse over the same period.
The support for the Conservative narrative derives from responses relating to the national economy. Immediately after the general election of 2010 around 60% thought that the national economy had got worse and only about 20% thought that it had got better. If we fast forward to October 2014 these figures are very different with around 30% thinking that the economy had got worse and just over 40% thinking that it had got better. This is a real turnaround in economic optimism which on the face of it should be helping the Conservatives to move ahead in the polls.
As we know, the gap between the parties in voting intentions has narrowed but the Conservatives are still behind Labour in most polls. Why haven’t they done better as economic optimism has risen? This is largely because of perceptions of personal finances which support the Labour narrative. Just after the 2010 general election about 10% thought that their own personal finances had got better in the previous year and just under half thought they had got worse. By October of this year about 20% were optimistic about their own finances while about 40% were pessimistic.
In other words, a real divergence has opened up between perceptions of the national economy and personal circumstances. This has not been seen before, since these measures usually move in tandem, something apparent in the chart up to the start of 2013. The data shows that people are well aware that the economy is recovering but most just don’t think that it applies to them.
All three parties have a problem with the positive side of their economic messages. The Autumn Statement has put the Conservatives in the position of promising endless austerity and an undeliverable commitment to reduce the size of the state back to the 1930s if elected. Labour has trouble persuading people that the events of the 2008 crash will not be repeated again if they are in power, and the Liberal Democrats have the most difficult job of all.
They have to argue that the coalition has succeeded because of the recovery while at the same time arguing that it has failed because the recovery appears to be imbalanced and unfair. A message which argues that the only successes of the coalition are down to the Liberal Democrats while in other respects it has failed is a difficult one to sell.
The Conservatives made a mistake in the Autumn Statement and so it is no surprise that Cameron has attempted to rapidly reignite the “Labour crashed the car” narrative. The “ominous dark clouds” from his speech on Monday may have morphed into a biblical monsoon by the time the long campaign nears an end. Labour’s response is a tricky call and the party is currently falling into a trap of bidding in an auction about who will reduce the deficit most. This is what Miliband’s recent promise on the deficit sounds like. Both leaders are sounding like the pre-Keynesian economists from the 1930s who argued that balancing the books was the only solution to the great recession. As we now know this was completely wrong and it feeds the perception, particularly among Labour’s working class supporters, that there is no real difference between the two parties.
If the Conservatives go negative, then Labour needs to go positive and argue that the priority is growth and prosperity, not balancing the budget. There is a lesson for the party in the recent electoral success of the Japanese Liberal Democrat party leader and Prime Minister, Shinzo Abe. When first elected he broke with the policies which had dogged the Japanese economy since the early 1990s and made fighting deflation the highest priority. This has turned out to be a tough challenge, but his party nonetheless won the recent election.
As a number of economists have pointed out, the low interest rates are an opportunity for government to borrow for investment at historically cheap rates. If financial markets were actually spooked by government borrowing then the Bank of England would have trouble covering long term debt and there is no sign of this happening. Balancing the budget in the lifetime of a Parliament is about as sensible as someone paying off their mortgage in five years as opposed to the standard twenty or twenty-five years. Since austerity policies are currently threatening to plunge the euro zone into semi-permanent deflation, this is not a sensible strategy for any party trying to win the next election.