New Labour’s Economic Dream turns to Nightmare?

The Sunday Times offers an article which suggests the public’s perception of New Labour’s economic policies are turning decidedly sour.

“By 78% to 12%, voters think that the government wastes large amounts of money and is not trying to do anything about it,” according to David Smith.

It was all looking so good. Taxes and spending were constrained by the Code of Fiscal Stability and the newly independent Bank of England played its part in maintaining low inflation and - just as importantly - the expectation of low inflation. The economy was growing, jobs were being created alongside stable prices and this triple holy grail of supply-side growth was occuring alongside strong gains in the housing and stock market.

Hindsight is a wonderful thing!

Graham Taylor, former manager of the England football team, once made the point that his critics’ teams never had to play a game. Improvements can always be offered in retrospect, and problems foreseen. To me it is all about interest rates and credit. UK interest rates were historically low but relatively high (when compared to our main trading competitors) during these golden years, and the consequent boom in credit availability alongside a strong pound kept demand buyant, import levels high, and a serious decline in the saving ratio. The housing market (and the buy-to-let extravaganza in particular) provided a diversion for savers seeking higher returns, and the impact of globalisation and strong sterling provided cheap foreign goods which boosted our spending as well as dampening overall pressure on consumer prices.

Of course, the important question is should the MPC have increased rates (to decrease borrowing and increase saving) or cut them (to allow the pound to weaken) between 1997 and c. 2006? As Graham Taylor identified - it’s easy to comment after the fact.

So where from here? Even the government’s attempts to influence social and environmental problems are now being criticised:

Green taxes, such as those on “gas guzzling” cars, are seen by nearly three-quarters of people as a cloak for raising the overall tax burden. Higher taxes on alcohol are seen by 85% as irrelevant to the problem of binge-drinking but as a source of revenue.

In addition,

Confidence in the government’s management of the economy is slipping. Pollsters regard “pocketbook” factors – who people trust to run the economy – as a key measure of how they are likely to vote in an election.

The latest poll suggests that the Tories have opened up a 12-point lead, 33% to 21%, on economic competence, double what it was a month ago.

Whether Labour can get that back depends on the economic outlook as much as on policy. Almost half of those polled think Britain will either not grow at all this year (24%) or will go into recession (23%). Gloom about the housing market is not yet widespread – by 35% to 30%, people think house prices will fall – but almost a fifth are more worried about losing their job.

On the theme of unemployment, The Sunday Times also offers a league table of 60 areas where at least 50% of adults are on out-of-work benefits. It makes for a (depressing) picture of structural unemployment in the UK.