It’s time for Osborne to lift the Tory veil

From Brighton to Manchester. The lower reaches of the football league, the old Division Three, to the top of the Premier League. The analogy is not perfect — the Conservatives are losing their way in Europe — but it will do. For the first time in nearly two decades they are holding a pre-election party conference with a reasonable chance they will form the next government.

That means there is added pressure on the party to lift the veil on policy, particularly economic policy, where we have had plenty of generalities but few specifics.

Before getting into that, let me destroy one or two myths. First, for all the talk from David Cameron about fixing the roof when the sun was shining, the public finances going into the crisis would have been no better under a Tory government.

The Tories, in their 2005 election manifesto, promised to match Labour spending on the NHS, schools, transport and international development and spend more on police, defence and pensions. Despite this, the party said it would save £12 billion on spending, £4 billion for an immediate tax cut, £8 billion to cut borrowing.

That £8 billion is roughly what Labour raised in additional taxes after the 2005 election. So, even if the Tories had managed to squeeze £12 billion out of spending, government borrowing in 2007 would have been similar under either party.

Second, the public finances in the recession might have been slightly better under the Tories but not significantly. Alistair Darling introduced time-limited tax cuts and brought forward some government spending in a textbook Keynesian response to a recession caused by an external economic shock. Those measures helped.

It is no use asking retailers if the Vat cut helped. It increased households’ after-tax income, some of which was spent. Unless retailers have taken to asking their customers where they got their money from, they have no way of knowing whether the cut worked. The plain fact is that retail sales held up a lot better than they or most other people expected, partly because of Vat.

The car scrappage scheme, initially £300m, now £400m, worked even more convincingly. The aim was to keep the motor trade ticking over until company car sales come back on stream, and it has succeeded.

The point is that Darling’s mini-stimulus had an impact, and generated some revenue. The Vat cut and other measures were not self-financing but they made a contribution to preventing an even deeper recession. Britain, in the G20 chair, probably also needed a modest fiscal stimulus in order to look other countries in the eye and persuade them to do likewise (and more), to the benefit of British exporters.

The bigger point is that the overwhelming reason the public finances are in the state they are is not due to deliberate policy actions but the impact of recession, the so-called automatic stabilisers. This recession exposed vulnerabilities in the public finances that nobody — government, opposition or independent experts — expected. Of the £175 billion budget deficit, all but a tiny amount reflects those vulnerabilities.

Third, there is some truth in Gordon Brown’s charge that the Tories were found wanting in the banking crisis. We cannot know exactly what they would have done, availed of the expert advice available to the Treasury. There were, however, Tory reservations about government intervention, which came out over Northern Rock.

As an opposition, the Tories did not cover themselves in glory, in some cases adding to a difficult situation. A year ago, following a meeting with Mervyn King, George Osborne was accused of blurting out the outline of the government’s recapitalisation proposals before the Treasury had finalised details. David Cameron’s frequent suggestions that Britain might have to be bailed out by the IMF were, as Vince Cable has said, daft and irresponsible.

The Bank of England is pleased with the effects of quantitative easing, as a speech by monetary policy committee member David Miles made clear last week. He argued it had boosted demand in the economy and begun the process of a welcome shift away from excessive reliance on bank finance to, in the case of companies, the corporate bond market. The “shadow” MPC, by the way, thinks quantitative easing should be extended beyond November and the current £175 billion planned.

The Tories did come round to backing quantitative easing — the party has high hopes of the Bank — but Osborne’s initial response condemned it as the last resort of a desperate government.

That is all water under the bridge. What will the shadow chancellor tell us this week? The prime minister has promised to enshrine in law a requirement to halve the budget deficit over the next four years.

Osborne wants as his main priority to get it down more rapidly than that and will have his own Office of Budget Responsibility to help him in that task. Politically, it makes sense. A Tory government will want to get as much of the fiscal pain out of the way while it can still be blamed on Labour.

Economically, getting the public finances back into shape without undermining recovery has to be right. Guessing when the next recession might be is a mug’s game but we will not have as long an upturn, 16 years, as last time. So it makes sense to recession-proof the public finances as much as possible long before then.

Osborne’s second broad aim is to rebalance the economy between savings and investment. I discussed savings last week, expressing scepticism about whether we will ever become a nation of savers.

But he is right to look for a better balanced economy and a future in which there is less borrowing for “unproductive” house purchases and government spending, and more for productive investment, though that has been the holy grail for chancellors for at least the past 50 years.

Brown promises a £1 billion National Investment Corporation, a fund for new and innovative businesses. Osborne has in mind something like the Industrial and Commercial Finance Corporation, established by a Tory government, which evolved into 3i. As with all these things, the devil is in the detail. It is not clear how much detail we will get this week.

In some ways Osborne’s task is straightforward. He has to show the Tories are not slavering to slash public spending but can cut intelligently. He also has to set out a realistic but optimistic vision for the economy. People don’t like voting for misery, though they may get some. (David Smith, The Sunday Times) http://business.timesonline.co.uk/tol/business/columnists/article6859983.ece

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1 Comment

  1. […] Tory economic plans Pressure is building on the Tories to explain what they will do if/when they take power in the next election.  It’s probably been sensible to keep things close to their chests to-date but they now need to demonstrate they’re actually capable of running the country.  Things look pretty good so far on this front (with ideas like the one above) – they do need to move quickly from critical (of Labour plans) to confident and constructive tho’.  Depression-averted now’s the time for some positive thinking.  More info here … […]


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