Andrew Gamble, Professorial Fellow at SPERI – 13 January 2015

In a speech delivered at the end of last year [2014] David Cameron at last followed the advice which his election strategist Lynton Crosby has been urging and focused on the economy, seeking to build on the momentum of George Osborne’s Autumn Statement.  He carefully repeated the attack lines of the last five years.  Labour alone was responsible for the 2008 financial crash, the subsequent spiralling public deficit and the recession.  The Conservatives took the tough measures needed to strengthen the economy, but there is still much to do, and only the Conservatives can be relied on to finish the job.  Labour’s policies threaten the economic recovery because they would mean more spending and borrowing and increase overall public debt.

This pitch makes good short-term political sense for the Conservatives.  They have a 25 per cent lead on economic competence.  But, because this is not yet reflected in the national polls, the Conservatives are seeking to strengthen their position by exaggerating the division between themselves and Labour.  If they can get voters to focus on the difference between their plans and Labour’s plans, they may be able to swing enough voters to their side in the next few crucial months.  This strategy is also designed to undermine UKIP, encouraging disaffected Conservatives to come back to the party.

Accordingly, Osborne has been carefully reminding different groups of voters how the Conservatives can be relied on to look after their interests.  He has announced a series of fiscal changes which redistribute income, subsidising some groups at the expense of others. They include the cut in stamp duty for home buyers, the plan to issue pensioner bonds for those over 65 with interest rates above current market rates, the liberalisation of the rules on pensions and the £7.5 billion commitment to increase tax thresholds.  The Conservative offer to voters at the next election will assert that, although austerity must continue so as to create a ‘sound economy’, it will not harm those core parts of the welfare state on which everyone relies – health, education, pensions – and will not prevent the government from reducing the taxes of middle England or investing in big new infrastructure projects like HS2, a third London runway and new motorways.

This seems incredible to most analysts, but it is politically astute.  If the Conservatives have their way the election will be dominated by debate about the deficit, and who can be most trusted to eliminate it and restore the conditions for prosperity.  In his December speech David Cameron argued that the Conservatives have a long-term economic plan, which is focused on ‘sound public finances and reducing the deficit’.  He went further: ‘you can’t build a better future on a mountain of unsustainable debt. Sound finances are the foundation of everything.’  Labour plans would produce ‘total and utter chaos’.  The choice at the next election was therefore framed as a choice between ‘competence and chaos’.

The problem with this claim is that there is no evidence that the Conservatives are committed to sound finance.  Quite the contrary, in fact.  Cameron was strongly criticised after his conference speech by the Financial Times because so many of his fiscal promises were unfunded.  This was, after all, a Government which declared in 2010 that it would balance the budget and eliminate  the structural deficit by 2015.  Instead, the Government has been forced to borrow another £200 billion and the overall debt has continued to climb.  It is now expected to peak at 81.1 per cent of GDP in 2015-16.

The Government’s excuse is that it was blown off course by the crisis in the eurozone, but still managed to halve the deficit.  Cameron repeated this claim in his speech.  But, as Fraser Nelson, the editor of the Spectator, has shown, this is incorrect.  The deficit has not been halved.  The cuts which the Government has implemented (mainly on local government, the poor and the disabled) have only reduced the deficit by a third.  Progress has not even matched the plans of Alastair Darling’s last budget.  This is hardly sound finance.

Indeed, one of the striking thing about fiscal politics in both the UK and the US (the eurozone is another matter) is that there are no fiscal conservatives left.  A true fiscal conservative like Andrew Mellon, US Treasury Secretary at the time of the last Great Crash in 1929, would not just have cut spending but would also have raised taxes to balance the budget.  Contemporary governments find it very difficult to raise taxes; instead, they constantly seek to reduce taxes, but at the same time they also pledge to preserve the core entitlements (especially health, education and pensions) on which the majority of voters rely.

The reality is that the gap between spending aspirations and tax receipts can only be bridged by the extra revenues which flow from a growing economy and rising productivity, or by borrowing.  In the last five years growth has only picked up in the last eighteen months and productivity and living standards are still flat.  SPERI analysis following the recent Autumn Statement demonstrated how income tax revenues forecasts have been consistently revised down by the Office for Budget Responsibility, as forecasters continue to be surprised by sluggish tax revenues.  So the Government has already had to resort to borrowing.

In the next Parliament it is clear that whoever is in office will be forced to resort to borrowing again if tax revenues do not rise as forecast.  There will be further cuts (£30 billion are planned), but not on the scale the Conservatives are projecting.  Osborne has not dared to deliver such austerity in this Parliament because he is well aware that, had he done so, he would have tipped the economy into a much more severe slump and outright deflation.  He is resting his hopes for the future on a sudden surge of productivity growth and, if that does not materialise, which seems unlikely, on a new surge in private debt, supplemented by more government borrowing.

In sum, the claim to be promoting sound finance is a pretence, a political game.  The targets are elastic.  Up to now the pretence has worked well for the Conservatives.  Playing at austerity is much better than the real thing.  Voters do not seem to care very much.  However, it is still possible that they may start to notice that, despite what the Conservatives say, there really is no fundamental difference in how the major parties will manage the economy.  What passes as competence is really just another form of chaos.

© Andrew Gamble, 2015, reproduced with permission. http://speri.dept.shef.ac.uk/2015/01/13/competence-chaos/