The Labour party faces a political dilemma. Barely a day goes past without the more excitable parts of the British press trumpeting some new signal of Britain’s economic success. Every other headline screams that Britain is “booming” or that its factories are “roaring to life”. Every little jump in the flimsiest of economic indicators, every upward revision of economic forecasts, is celebrated as if it were a triumph worthy of song. And the propaganda seems to be working: voters’ confidence in Conservative economic management has soared, and in Labour’s has slumped.
So how should Labour respond? The first requirement is to separate the politics from the facts. Britain is not booming. Growth is forecast to be 1.2% this year – a dismal performance by any historical standard. As the Bank of England governor, Mark Carney, said in his first press conference: “This remains the slowest recovery in output on record.”
Five years after the onset of the financial crisis, Britain’s economy is still 3.5% smaller than it was in 2008. Growth may have spurted ahead of Britain’s competitors in the last quarter, but this comparison neglects the fact that it suffered a bigger fall in output and experienced a weaker recovery. The US, Germany and even France have surpassed their pre-recession peaks. Even according to the brightest forecasts, we will need another two years to make up the lost ground. And the picture is worse when we factor in population growth; GDP per capita is not expected to reach its pre-recession peak until 2018. We are only halfway through a lost decade.
The second task is to point out the brittleness of the recovery. Despite the government’s rhetoric on “rebalancing”, the growth strategy on which it relies is to reinflate the same bubble that caused the crisis in the first place. That is the real meaning, and effect, of quantitative easing.
The recovery, such as it is, is disproportionately based on debt-fuelled consumer spending and inflated house prices. This approach has been entrenched in government policy with the Funding for Lending and Help to Buy schemes, which channel money into the dysfunctional housing market. Even the housebuilders who will benefit from Help to Buy have warned that it could be “very dangerous” for the economy. When real wages have fallen by 5.5% in the past three years, and with the household saving ratio at rock bottom, the insistent question should be: how long can such a narrow recovery last?
The opposition has not figured out how to react to the “good news”. It was easy enough to point out Chancellor George Osborne’s failures when the economy was flatlining. Ed Balls, the shadow chancellor, made promising, if inconsistent, efforts to offer an economic alternative. True, too often Labour’s critique lacked any theoretical bite. It preferred to repeat that Osborne’s cuts were “too far, too fast”, rather than explaining why the cuts would harm the economy. But at the first sign of any economic growth, Labour has swallowed its tongue. Its focus on falling living standards targets the symptoms of an unhealthy economy, rather than the cause. Its decision to blame immigration for Britain’s ills, a tactic dusted off from the Blair years, is economically illiterate.
The truth is that Labour is terrified that the perception of economic recovery – the “feelgood factor” – may count for more than the facts of a recovery that leaves 8% unemployed, five job applications for each vacancy, falling living standards, thousands of ruined businesses, and millions of part-time, minimum wage, zero-hours contract jobs.
It fears that, set against the gloom of the past three years, the enthusiasm produced by even a low level of growth may be enough to keep the government, or at least the Conservatives, in power. This argument has a long pedigree: Ed Miliband has no desire to be another Neil Kinnock, proclaiming doom when things are palpably improving.
The politics of the matter is far from simple. But if I were in Labour’s shoes I would hammer home one simple message: the pain has not been worth it because the recovery is not secure. I would explain why printing money to offset cuts in public spending is the flakiest possible route to growth and is bound to land us in a fresh crisis sooner rather than later, and why an alternative policy of targeting growth and letting the deficit look after itself would be better for growth and for the debt. And I would have enough confidence in my argument to wait for events to vindicate it, rather than flopping around with each new set of figures.
Robert Skidelsky 