Cameron reaches a crossroads

by Kevin Meagher

David Cameron was fond of claiming that Gordon Brown “failed to fix the roof when the sun was shining”. Now his chancellor blames the economy’s 0.5% retraction on the snow.

Of course the wintry weather did growth no favours. But George Osborne’s feline political skills eluded him big time yesterday. Did the figures come as a surprise? Caught on the hop? Blaming the elements is reminiscent of the howlers Norman Lamont used to make when he was chancellor. “Je ne regrette rien“, George?
Perhaps he just realised he had nowhere to hide. After all, a government that has removed the roof tiles is to blame for yesterday’s atrocious growth figures.
This deterioration in the economy is theirs and theirs alone. Q2 and Q3 growth was reasonable; evidence of Norman Lamont’s infamous “green shoots” breaking through.

But these have been choked off by the £6 billion worth of cuts the government made last year and the endless sabre-rattling about cuts to come which has squashed consumer confidence.

George Osborne has not made the laws of economics redundant. Poleaxing tentative growth with a slew of tax rises and spending cuts as the economy crawls out of recession was always going to lead to this. Labour was right last May: the Tories cannot be trusted to secure the recovery.

As the governor of the Bank of England, Mervyn King, pointed out last night,

“In 2011 real wages are likely to be no higher than they were in 2005. One has to go back to the 1920s to find a time when real wages fell over a six year period”.

Conservative ministers – especially those with a long memory – will be justifiably worried. It was 19 years ago that a young David Cameron hung on the shoulder of Norman Lamont as a Conservative government’s economic policy was eviscerated. That was back in September 1992 when sterling’s overvaluation in the exchange rate mechanism caused a catastrophic run on the pound that forever became “Black Wednesday”.

This government is guilty of a different sin: underestimating the role public spending plays in driving demand, providing jobs and sustaining confidence during the economy’s tentative rehabilitation.

But the political implications of Cameron and Osborne’s misjudgements on the economy may be no less serious than Lamont’s and John Major’s.

Cameron is fast approaching a crossroads when he will either plough on with his programme of masochistic cuts on a timetable more terrible than anything that has even been countenanced before, or he will relent, perhaps using March’s budget as cover for a change of direction.

Amid the endless lectures about curbing the deficit, yesterday’s Times reported that George Osborne is amassing a “war chest” (variously estimated between one and five billion pounds) that may pay for the odd policy three-point turn. The endlessly postponed white paper on growth may finally materialise too. After all, if not now, when?

This comes at a time when the prime minister’s own side is warning him that he is out of touch with “aspirational” voters – most significantly, his former leadership rival David Davies. Andy Coulson’s exit from Number Ten provides an opportunity, his critics argue, for his replacement to bolster Cameron’s failing antennae when it comes to picking up signals from the denizens of Middle England.

The same critique comes from the left; only more so. It isn’t just so-called “aspirational” voters with whom this government has no affinity, it’s pretty much everyone. Rhetoric about “we’re all in this together” from a cabinet of tone-deaf trust fund Tories is a little hard to take.

Meanwhile, Cameron’s signature idea for plugging the gap left by a retrenching public sector – the big society – is leaking air faster than Eric Pickles after a late-night.

Monday’s Times reported growing panic in Number 10 at the reaction from Britain’s third sector, the very same “little platoons” that are supposed to step up and fill the void once the state retreats. They are in a tailspin, dealing with the double whammy of public spending cuts and shrinking voluntary donations.

As Sir Stephen Bubb, chief executive of the association of chief executives of voluntary organizations, put it in an open letter to David Cameron: “…your great ideal is about to be swamped by a tidal wave of growing needs and rising cuts.”

The response? Third sector minister, Nick Hurd, has written to Conservative MPs and activists, according to the Times, asking “what ideas they have to make the Big Society a success”?

It’s a bit late for blue skies thinking once you are sat in a ministerial office; and the situation is far more immediate for the government.

The intellectual underpinnings, such as they are, of Cameron’s political project are coming unstuck. Using the deficit as a trojan horse to roll back the frontiers of the state is not working as the electorate, businesses and voluntary groups wake up to the horrific implications of the cuts to come and kick back.

In forming the government he leads, David Cameron has shown his pragmatic credentials. He will realise, perhaps more than anyone, that the game is up and he needs to go back to the drawing board and recalibrate his economic plans. As, indeed, his mentor Norman Lamont was forced to do.

For the sake of the economy, let’s hope this epiphany comes sooner rather than later.

Kevin Meagher is a campaign consultant and former ministerial adviser.


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11 Responses to “Cameron reaches a crossroads”

  1. The trouble is that Ed miliband is being too nice, thus giving away the edge to Cameron everytime. Sure EM won today’s battle at PMQs, but look at the polls published in today’s Guardian – Labour is not getting the message across.

    If Labour is going to have any chance of winning back power, Miliband is going to have to develop a far higher profile, with an equal amount of political thuggery. Voters need to be convinced Miliband can replace Cameron. At the moment we are not getting the message across that he can do the job.

  2. william says:

    The stagnation of real wages ,2005-2010, took place under Labour.Compare and contrast government finances in 1997(pre the arrival of you know who) and 2010, when less than 30 percent voted Labour.If Cameron has reached a crossroad,it does not appear that he is faced with an opposition with a reasoned alternative strategy.More public spending may be the utopia for some(btw,it is going up under this government’s plans),but if you want yet more , you will have to face the market.Please learn the lessons of the past.

  3. Chris says:

    @william

    For somebody with a 1st in economics from Cambridge I’d have thought you’d have a bit more to say than the usual daily mail style nonsense.

    Wages for the bottom half of the income distribution have been flat for the best part of two decades; low inflation, cheap credit and rising house prices have made people wealthier.

    “Compare and contrast government finances in 1997(pre the arrival of you know who) and 2010”

    Didn’t you notice the financial meltdown that left every western government with deficits? Britain’s deficit is worse than over countries because of our over reliance on financial services, that was Brown’s error – not building a stable enough tax base. But then that is the free market for you.

    “More public spending may be the utopia for some(btw,it is going up under this government’s plans),but if you want yet more , you will have to face the market.”

    Public spending won’t in real terms increase and the money won’t be spent on providing the current level of services, it will instead go on welfare payments and debt interest. To increase public spending the government doesn’t have to go to the markets, we created £200bn through QE and gave it to the banks. Who are now sitting on it and paying themselves large bonuses for not doing very much, the government should create another £50bn and invest in commercial companies through the nationalised banks to generate growth.

    “Please learn the lessons of the past.”

    You’re the one who hasn’t learnt the lessons of the past and present, from 1931 to the present day it has been shown that governments who cut too far and too fast end up in a worse financial situation. We already see this with growth falling from 1.1% to 0% in 6 months on the back of excessively political propaganda about the state of the public finances.

  4. William

    Cameron and Osborne are guilty of the economic crime of this new millenium, their Laissez-Faire approach to business and banks bonuses is nothing short than woeful. In all fairness, the deadly duo were out of their depth and simply thought that by cutting public spending, like flicking a light switch was the way to go.

    Well, William, given stagflation, unemployment and rising inflation, surely your still not backing the idea that growth is secondary too the cuts programme?

  5. theProle says:

    “You’re the one who hasn’t learnt the lessons of the past and present, from 1931 to the present day it has been shown that governments who cut too far and too fast end up in a worse financial situation. We already see this with growth falling from 1.1% to 0% in 6 months on the back of excessively political propaganda about the state of the public finances.”

    The problem is we are between a rock and a hard place.

    Gordon and co spent too much while the going we good. In 1997, he inherited a small surplus, and this remained all the while he stuck with Tory spending plans. Once free of his commitment to match the Tory plans, public spending rose rapidly, launching the finances into a deficit while in the peak of a boom.

    Then came the crash, and tax revenues collapsed, while welfare spending rocketed. Cue mega size deficit.

    This leaves the government in an impossible position. Keynes advocated spending during recessions, but that assumes that there is money available to spend from the boom years. Gordon having already raided the till in the boom had nothing left to spend on a recession.

    Simple you say – borrow more. Who from? Ah, harder question. Labour financed it’s increased borrowing by printing £200Bn. This isn’t a long term plan, all printing money does is send inflation rocketing. It sort of solves the problem, but only until wages start rising. Borrowing without printing money isn’t much of a option either, we would end up with Greek style crisis, as we would fail to sell bonds except at infeasibly high rates of return.

    So, we can’t carry on spending without inflating the results away. If we cut spending, we damage growth. Bit of a problem then.

    I would suggest the best option is a mixture of spending cuts, and targeted tax cuts, aimed at growing jobs and tax revenues in the private sector as fast as possible. Focus the spending cuts on imports where possible, (that way it’s other people’s economies we are trashing), cut overseas spending (international aid, EU budget contribution), target the tax cuts to specifically encourage employment – cut income tax for the lower paid, cut employers NI. Possibly cut corporation tax for exporters, to make them more competitive abroad, bringing money into the UK.

    We can also try and maximise tax revenues, by optimising tax rates. Cut the 50% rate tax, it doesn’t make any extra money, and encourages tax avoidance measures. Cut corporation tax rates to a competitive level, and multinational companies will relocate headquarters here to take advantage.

    The government can, and should explore other revenue streams to tide over the shorter term deficit if possible – privatising some state assets probably makes sense in this context.

    Some of these changes would have faster effects than others, but combined they should rapidly

  6. william says:

    the Prole is pretty much right.Chris seems to think that creating £200 billion will somehow make us better off.The banks go to the window, borrow at 0.5 percent and buy gilts yielding 4 percent, nice business to rebuild their shattered balance sheets from excessive property lending,thankyou the taxpayer, hello inflation the money supply has more than doubled.Meanwhile, the poor old depositor earns nothing on his savings as the Governor refuses to put up interest rates.Chris, Brown’s errors resulted in TWO MAJOR BANKS GOING BUST.The structural deficit that he put in place is the cause of the interest bill.December,2012 base rate 4-5 percent,house prices down 15 percent in the south, .Roy Jenkins knew about economics.

  7. theProle

    Cut corporation tax? come Prole, don’t you think every other nation in the EU would like to lower corporation tax? Jeez!, your just adding fuel to the fire and encouraging protectionism.

    When Keynes, suggested investment over stagflation, Britain was bank-rupt, Keynes secured the anglo-American loan?

    Proles, Osborne has been knee deep in QE and the bank of england has been rolling out 10 year gilts for Boy George’s war chest.

    Proles, here’s the bit you seem too miss, under the last conservative government of Thatcher and Major, they left GDP at 47%, Brown reduced that to 43% prior to the world crash, allowing Britian to take the stimulus action it did.

  8. Chris says:

    @theProle

    “The problem is we are between a rock and a hard place.”

    Like I said earlier, Osborne & friends have been putting out excessively political propaganda about the state of the UK’s public finances. Many non-partisan analysts have mentioned the hyperbole of Osborne’s pronouncements, which seem to have comeback to bite him in the ass in Q4.

    “This leaves the government in an impossible position. Keynes advocated spending during recessions, but that assumes that there is money available to spend from the boom years. Gordon having already raided the till in the boom had nothing left to spend on a recession.”

    No it doesn’t. There is money available, Brown paid down the national debt before spending money. Ireland ran surpluses for 5 years before the crash and their national debt was tiny, hasn’t done them any good.

    To pay for your tax cuts and not increase the deficit you’d have to have even larger public spending cuts. Chopping the aid budget to zero would get you £10bn but not only would that have dire humanitarian costs, it would also greatly affect the UK businesses that sell the stuff sent to the recipients of the aid. A hell of a lot of the aid budget is spent in the UK. Significantly reducing EU budget contributions isn’t going to happen without full scale withdrawal from it, not really a sensible option.

    @william

    I don’t really think you know much about economics.

    “Brown’s errors resulted in TWO MAJOR BANKS GOING BUST.”

    No, two major banks errors resulted in TWO MAJOR BANKS GOING BUST. That is the free market, laissez-faire results in massive fuck ups that make the poor person pay for the rich person’s mistakes.

    “Roy Jenkins knew about economics.”

    Yes but he didn’t know much about winning elections.

  9. william says:

    Chris,for the record,Roy Jenkins was elected as an MP in 1964,1966, and 1974,THREE Labour election successes.He then won a pretty sensational bye election in 1982 for Glasgow ,Hillhead.You may believe that the free market laissez faire combined with bank errors was the problem,but the fact is on the tory watch Johnson Matthey went under, no big deal,and then under new regulations introduced by GB,RBS and HBOS imploded.

  10. William

    Lehman Brothers ignited the bank crash, toxic debt in America was rife and of course Bush’s conservative measures were very much at the fore front.

    Why didn’t you mention Northern Rock?

  11. Chris says:

    @william

    “Roy Jenkins was elected as an MP in 1964,1966, and 1974,THREE Labour election successes.He then won a pretty sensational bye election in 1982 for Glasgow ,Hillhead.”

    WTF? What does that prove? He wasn’t leader in 64, 66 or 74 and he later lost Hillhead to George Galloway. When he was the front man for the SDP in the 83 election he failed to break through at a time when Labour were committing electoral suicide. And don’t forget that he made a significant contribution to losing the 1970 election by not putting any sweeties in his election budget, a mistake Osborne won’t be making.

    “You may believe that the free market laissez faire combined with bank errors was the problem”

    No, it was the problem. Brown’s regulatory system was no regulation, he allowed the bankers to do as they wished.

    “but the fact is on the tory watch Johnson Matthey went under, no big deal,and then under new regulations introduced by GB,RBS and HBOS imploded.”

    Barings? BCCI? Latin American Debt Crisis?

    The pre-1997 regulatory system wasn’t great but neither was the post-1997 one, moving the FSA back into the BoE won’t make any difference, increasing the regulation and oversight of what the banks are actually doing is the only thing that will.

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