Recession? Labour must chart a clear course through its wake.
Can New Labour survive a recession? We might be about to discover the answer.
There ought to be no doubt that we will. One year on from the beginning of the credit crunch, tougher economic times are ahead. Media speculation might focus on the leadership. However, the future of the Labour Party and progressive politics depends on us making sure our economic policy is right and communicating it clearly to voters.
The economic picture is confused because inflation figures are rising. Prices rose 3.8% in June, according to the Consumer Price Index (CPI). The Retail Prices Index recorded a rise of 4.6%. These inflation measures are being pushed upwards by higher fuel and food prices. We all feel this. If you drive an hour to work each day and are a parent, you are certainly feeling the difference. The family shopping basket is costing more. People are changing their behaviour as a result. Commuters are sharing car journeys. Some people are trading down from restaurants to luxury supermarkets and supermarket Asda reports that more customers are buying budget food items. So-called non-discretionary spend items have increased in price. As people spend less on items such as electronic goods and even clothes, so retailers are feeling the pinch. Their costs are rising but demand for their goods is dropping, so prices are being cut. In such circumstances there is pressure for wages to rise to match the rising cost of living. That seems fair but it will not change the fact that real incomes have fallen and so could prompt a wage-price spiral.
The UK is experiencing a price shock because emerging countries have an inflation problem. They are raising interest rates in response. The most likely outcome for the UK is still not some sort of 1970s stagflation but a slowing of economic growth and for longer than expected. This seems a reasonable conclusion because the credit crunch is putting pressure on employment and so limiting the potential for high wage increases. The recent Bank of England’s Agents’ report seemed to confirm this, describing employees as more concerned with job security than pay. Pay pressure is mainly seen in the public sector (often not well-paid to begin with). Business surveys suggest that jobs may be under threat as the services sector looks to retrench. The Bank of England reports that banks are continuing to restrict lending to businesses. For businesses, that means it might become difficult to invest or make acquisitions. City commentators expect unemployment will rise. While expectations of higher inflation are rising, the underlying story is slowing growth. Indeed, the recent rapid fall in the oil price has already been echoed in lower petrol prices, and the price of food on the commodities markets has fallen too.
The credit crunch is working its way through the economy but many have yet to notice it. Borrowing via credit cards and unsecured loans has risen amongst households. It is not clear why this is the case. It could be that some people are paying mortgage payments with credit cards, a horrendous thought. Consumers are probably taking advantage of cheap goods on the high street and continuing to borrow to fund purchases while limits allow. Yet mortgage terms continue to be restricted and house prices are falling sharply.
The government faces some difficult policy choices. The March Budget finessed the public finances but the measures to offset the 10p tax rate abolition and the deferment of petrol duty increases will all cost. The data on government finances in June made sobering reading. The Public Sector Net Borrowing deficit was £9.2bn, which was worse than forecasts. So far, it is running almost £10bn ahead of the last fiscal year. Tax receipts are down on last year.
The Treasury is reported to be revising the fiscal rules introduced by Gordon Brown when he became Chancellor. The rules were established to promote faith in Labour's economic prudence, so changing them is not without risk. Nevertheless, the events of the past year have been exceptional and economic history teaches us that sticking blindly to past orthodoxy in crises can make matters much worse. The sustainable investment rule, which states that government net debt should not exceed 40% of GDP, probably needs amendment. The limit was always arbitrary and should probably be raised if it is to be kept. This is especially so because the deleveraging has further to go and the government may be required to expose more of its balance sheet to limit the fall-out, even if that risks raising long term interest rates.
Labour has managed the economy well and we should not be put off by Tory propaganda. An open economy such as ours will be affected by outside shocks from time to time. It is a price paid for a prosperous nation. Most people acknowledge this. What matters is how we respond. The Conservatives do not have a coherent economic policy. Our policy must be clear and repeated often. Even a revised fiscal framework must provide assurance that government borrowing will not get out of control. Our aim to help the long-term sick back into work is laudable and progressive but we must now think through our message for a period of rising unemployment. Ministers need to have new proposals and measures that meet the challenge ready to go. This means more than adjusting a tax credit here and a tax allowance there. Better training opportunities and more support for those on low incomes will become essential.
The financial crisis has shaken the way even the City looks upon finance and markets. Now is the time to emphasise our vision of a society in which everyone has a meaningful stake. If banks require more taxpayer support, it could be in return for a measure of social investing in poorer communities. Government investments in education and our transport and communications infrastructure should be upheld as examples of investing in our common wealth, essential for high productivity, good business and jobs. A man or woman worried about job security and struggling to meet rising bills and mortgage payments must always know Labour understands and will help where possible. We understand because we are not a party of privilege. We will help because that is what our Party is for. That man or woman should know too that we are not just thinking about the problems of today but will be with them in tackling the challenges of tomorrow.
Of course, we may discover that, as in 2001, we have all become unduly pessimistic about the economy. Either way, having dealt with the immediate financial turbulence, we must now chart a clear course through its wake.
|This article previously appeared in Tribune magazine.
Stephen Beer, Friday 1 August 2008
Central banks are struggling to head off general inflation while dealing with price shocks that will be negative for growth. They waited too long, which has made their tasks more difficult.