The economy will recover – but Labour won’t

The dividing lines over how to make inevitable cuts in public spending could spark a fundamental realignment of the Left

As this is my last column before taking leave to write a book about the Great Depression that never happened, let me try to forecast some of the main events that will probably happen in the months ahead.

Between now and Christmas, the recession in Britain will almost certainly end. That, at least, will be the official story, with government statisticians declaring an expansion in GDP. Unemployment will rise for another six months or so, but is unlikely to reach the shock-horror levels above 3 million thought inevitable a few months ago. House prices will probably stabilise after the recent sharp rebound and in stockmarkets, too, normal conditions will gradually return. So it seems this recession will be considerably less painful than the Tory ones of the 1980s and 1990s, when unemployment peaked at much higher levels and more people lost their homes.

But just because a greater disaster has been avoided, it will not send grateful voters flocking to Gordon Brown. On the contrary, the Government’s political troubles will probably intensify.

With no improvement likely in Mr Brown’s dismal poll figures, Labour loyalists will have to start taking seriously my argument, now gaining attention among the chattering classes, that the 2010 election may not merely mark another rhythmic swing from left to right in Britain’s political pendulum.

Instead it may set off a once-in-a-century upheaval in the structure of British politics, with the Liberal Democrats displacing Labour as the dominant part of the Left in a neat reversal of the process that began almost 100 years ago with the defeat of David Lloyd George.

Let me give two reasons why Mr Brown should draw no comfort from the improved economic prospects. First, the end of a recession as defined by statisticians is not a return to economic prosperity as understood by voters. Statistically, a recession is a period of falling output, incomes and employment. Once the decline is over, economists consider normal conditions to have resumed. For ordinary consumers, workers and voters, however, what matters is not the rate of change in economic activity but its absolute level and how this compares with the last period of prosperity.

Even if the economy grows strongly after a recession, as it did in 1981-83 and 1993-95, voters feel that the country is still in hardship as long as the availability of jobs, the price of houses and the standard of living remain below the maximum levels reached in the previous boom. But for the economy to clamber out of the hole created by a deep recession and return to its previous peak can take several years, which is why government popularity rarely improves immediately one is over.

The second reason not to expect any political dividends for Labour from the end of recession is more specific to this cycle: the magnitude of the hole in Britain’s public finances. The gap of almost £200 billion or 14 per cent of national income between what the Government spends and the revenues it receives means that big cutbacks in public spending and increases in taxation are inevitable, whichever party is in power.

For Labour, the universal acknowledgement of this reality is trebly disastrous: first because Mr Brown spent months trying to deceive the public about the outlook for public spending; second because Labour is justifiably blamed for having let spending grow so much faster than the sustainable level of Treasury revenues; and third because the Liberal Democrats and the Tories seem to have better ideas on how the inevitable reductions can be achieved without causing too much damage to services valued by voters.

That last point brings me back to the possible realignment of the Left. The issue bound to dominate British politics in the next Parliament and beyond is how to achieve large spending cuts after a decade in which the public sector has grown much faster than the private economy.

The obvious answer is to reduce dramatically the role of the State by abolishing all sorts of “public” services that ought to be left to individual responsibility and the private sector. This is a perfectly plausible answer that appeals to that 30 or 40 per cent of the electorate who are ideological conservatives.

There is, however, another plausible answer, which a modern party of the Left needs to develop: to maintain and improve public services while simultaneously reducing their cost. Labour activists generally believe this combination to be logically impossible — in their world view any reductions in spending are equivalent ipso facto to cuts in the services that the Government provides. This idea that the standard of public services is equivalent to the level of public spending might just have been defensible in the pre-computer economy when service industries were believed to be incapable of productivity growth. But in the modern economy, equating the quality of government with its cost is manifestly absurd.

According to the Institute for Fiscal Studies, the “eye-watering” squeeze needed to bring Britain’s public finances back into reasonable balance translates into a reduction of 8.6 per cent in departmental budgets spread over three years. If the directors of any private company sent their line managers an instruction to reduce costs by that amount over three years, with no loss of customer service or output, this would not be considered an insuperable challenge, still less a managerial nightmare.

To judge by this week’s conference, the Liberal Democrats have started thinking along these lines. Reducing or freezing the pay and pensions of public employees is a constructive alternative to cutting the number of employees and the services that they provide. Limiting universal payments such as child benefits, student grants and housing subsidies is a constructive alternative to slashing welfare for those in greatest need. Raising energy and property taxes is a constructive alternative to income tax rates so high that they become economically counter-productive.

The great political challenge of the coming decades will be to find ways to deliver the high standards of public service demanded by voters at a cost that taxpayers are willing to accept and that the private economy can support. Any party that takes it as axiomatic that cuts in public spending can be achieved only by slashing public services will find itself marginalised in this debate.

Will this be the fate of Gordon Brown’s Labour Party? The answer will become clearer as the election approaches. (Anatole Kaletsky, The Times)


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