Tuesday, July 22, 2008

Since May...

I've been meaning to get back to posting more regularly for a while, and I notice that back in May, almost 2 months ago, I promised to discuss Crewe & Nantwich.

Of course, since that by-election there's been Henley and Howden & Haltemprice. Before the local elections, and even with them, it could be claimed that Labour was just in the middle of a normal 'mid-term blues' patch.

The local elections in May 2008 were not much different for Labour nationally than the results of the previous year or (perhaps more significantly) 2004 - a year before the last General Election. However, the main difference is that the Tories are now a more credible force and they are able to maintain a sustained lead in opinion polls.

The economic situation is also confused and likely to become harder in some way. The problem is that oil and food prices have risen sharply (the price of oil has a major impact on the price of food, due to increased transportation costs and the surprising amount of energy used to grow food crops and create fertilisers). This is having an inflationary effect, making life harder for people on low and fixed incomes.

At the same time, the US-born credit crunch has combined with the long anticipated peak in the UK property market to start affecting economic growth. I remember way back in 1999 I was a bit worried when I bought my house that prices were unsustainably high. Since then they have more than doubled and every year various 'economic experts' have predicted a 'correction'. Now it's here everyone has suddenly begun to panic a bit.

However, we are not in recession, and even now there is likely to be a small amount of growth in the UK in the next year (technically a recession is two successive quarters of a shrinking economy in GDP terms). Of course, some sectors will be affected more than others. The current strength of the Euro means that the Pound is cheaper, making our exports more competitive - which is good for manufacturing. On the other hand, construction is getting hit hard and retail (having been able to rely on a steady stream of customers on credit) appears to have been doing poorly. Unemployment is going up again, although it's still relatively low for now.

The problem with the combination of low growth and high inflation is that the usual solution is to adjust interest rates, but the direction is different for each. To encourage growth (and counter the credit crunch), lower rates would allow more cash to flow. However, higher interest rates are the usual salve for inflation, the idea being that it restricts cash flow to reduce the demand-led pull on prices.

My opinion is that as the inflation is not demand-led but comes from the supply side, increasing interest rates is not likely to have as much of an effect as usual. However, the Bank of England was tasked (by Gordon Brown) with keeping inflation under control, but not explicitly to prioritise the rate of growth of the economy.

Anyway, all of this leads to uncertainty and pessimism. This will naturally reflect on the government whichever party ran it. As Labour has been in power for eleven years, and as Gordon Brown was Chancellor of the Exchequer for ten of those years before getting his promotion, it becomes even easier see it as down to Gordon and the party. That the credit-crunch was precipitated by the even more loopy borrowing rampant in the USA, and that oil and food price inflation are both global phenomena make little difference to most people.

So, the economy is leading to a wide-scale malaise in Britain, and is also leading to two problems for the government. Firstly, a slowdown in economic growth puts pressure on government spending but inflation leads to higher wage demands from public employees, so we are seeing more complaints and strikes from them. This adds to a picture of a government losing control - and is particularly bad when a Labour government is in open conflict with it's affiliated Trades Unions.

Secondly, the malaise is self-perpetuating. Just as a boom is often fuelled by people being confident and borrowing against a rosy future, a slowdown can be worsened if it becomes the main topic of discussion and people start assuming the worst. It is possible that we could 'talk ourselves' into a recession. At such a time, we would need a very confident leader who could project a more positive image. Gordon Brown, it seems, is not that leader. As much as I was opposed to Blair (and to Blairism) within the party, I did think that Brown would make a decent Prime Minister. A year ago it all looked very positive - even flooding in East Yorkshire seemed not to have a negative effect - and Brown appeared to be a welcome change after the populist and PR-led Brown. But while Brown is good during the good times, and while he was able to react well at first, there have been several areas in which he's been less than impressive and has appeared to be letting things get out of his control.

Last autumn, during the media-frenzy over whether Brown would call an early election or not (I still think he was right not to), there were a couple of wobbles where it seemed that the Tories were pressing the agenda, particularly on Inheritance Tax. However, the real seed of Brown's current unpopularity stems from his last Budget as Chancellor:

Brown did something very silly with Income Tax, using the abolition of the lower rate of 10% to help pay for a cut in the main rate of tax from 22% to 20%. For anyone with an income below £18,000 who was not on tax credits, this meant a loss. This was bad enough, but the worse thing was that Brown denied that anyone would be worse off. Frank Field and other Labour backbenchers had been questioning this for a year, but it was only when it became more immediate and Alistair Darling had missed the chance to deal with it in his first Budget that the media and the Tories started to really press the issue. The 'fix' was to play with Allowances, which did reduce drastically the number of losers among the low-paid but also meant that people on medium earnings got a further reduction in tax. As this 'fix' doesn't actually come into effect until the Autumn and is only really going to be in effect for this tax year unless further changes are made.

What this did was to undermine the claim that Labour was working for it's normal 'core' support, the working classes. Combined with higher prices for basics and greater worries about employment and debt, the last thing that people on low incomes needed was an increase in taxes. Even though that increase was small in cash terms, it was in some cases nearly 4% of total income.

Thing is, changing the Prime Minister (again) won't make a jot of difference. What is needed is what was needed about five years ago - a government that listened to it's own backbenchers and the party that got it into power, rather than being overly concerned with process and the latest polls.

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