This election will go down as a dishonest campaign: none of the parties came clean with the voters about the economy
The difference between the world we have lost and the one we are stuck with can be measured in billions of pounds. Before the crash, anyone could appear on radio or TV and demand inheritance tax cuts for the wealthy or income tax cuts for low earners; tax breaks for marriage, green energy, research and development or new businesses; tax credits for the poor and not-so-poor; and more spending, ever more spending, on our armies in Afghanistan, on our schools, hospitals, railways and roads, on starving children in Somaliland and obese children in Sunderland, on abandoned mothers, deprived toddlers and infirm pensioners, on the BBC, the film industry, theatre, opera and ballet, even on that classic example of “well it seemed like a good idea at the time” fiscal recklessness, the 2012 Olympics. Before 2008, the British could stand up and demand more for everyone, everything and, especially, for themselves. Although compliance with all the requests would have bankrupted Britain, each request sounded plausible because billions seemed to be available. Now each demand for money sounds implausible to the point of absurdity because we are bust, with debts running into the hundreds of billions.
Or rather they ought to sound absurd. Voters who weren’t paying attention to the election campaign may not have noticed the grim change in Britain’s prospects. The gap between optimistic political rhetoric and the woeful state of the nation’s finances was so wide that editors ought to be commissioning articles for a year from now contrasting what party leaders promised in 2010 and what happened to Britain in 2011. As in every election for as long as anyone can remember, the Conservatives said they wanted tax cuts, or to be precise to drop Labour’s proposed rise in National Insurance. They were the party that expected to form the next government, and ought to have known they would need every penny they could collect to pay down sovereign debt. But the insouciant Shadow Chancellor George Osborne decided to forget his grim warnings about Britain entering an “Age of Austerity”. Not only could a rise in National Insurance be spared, he could also afford to protect funding for the NHS and overseas aid, and find money from somewhere or other for cancer drugs and tax relief for married couples.
As has also been the case for decades, Labour responded to the Conservative challenge by promising to protect public services from the ravening Tory beast. For Gordon Brown, the Conservatives’ commitments to ring-fencing health and overseas aid were not enough: in Britain’s first-ever TV election debate, he taunted David Cameron about his failure to extend the same protections to teaching and policing. Voters should stay with Labour. It was prepared to make these promises despite the fact that at the start of the campaign the admirably straightforward Alistair Darling had said that if Labour won it would have to impose spending cuts far more severe than Margaret Thatcher ever dared implement. So, now I come to think of it, did Osborne and the Liberal Democrats’ Vince Cable in the chancellors’ debate on Channel 4. In the first of the TV leadership debates, the LibDems’ Nick Clegg, too, seemed to be facing reality. “We all know we’ve got this great black hole in our public finances,” he said. “We all know we’re going to have to save money, we all know we’re going to have to make cuts.” Yet much of his savings came from closing tax loopholes, which, like eliminating waste or believing door-to-door salesmen, is a strategy that habitually promises more than it delivers. Armed with this notional windfall, Clegg was able to offer the electorate generous tax cuts and funding on pet projects, from cutting class sizes to 20 in primary schools, to increasing one-to-one tuition for secondary school pupils, to abolishing tuition fees. All worthy schemes, to be sure, which had the added advantage of appealing to parents and students at university, but, alas, they were likely to be unaffordable.
Like gamblers who cannot accept they are in a losing streak, the political parties took what sparse winnings they made and threw them back on the table instead of banking them.
Whether for students, doctors or married couples, you should not make special cases in a financial crisis because all interest groups can put together an argument that they, too, are special cases. They are usually half right. Pure waste, such as in Labour’s disastrous IT programmes, is rare. Most spending has some good effect even if the benefits come at a disproportionate cost. Telling those who work in and use public services that there is no option other than to cut is a harsh business. You have to be able to promise equality of suffering or face a crowd of angry victims who feel that their cogent claim on the public purse has been unjustly ignored at the expense of undeserving rivals.
The election campaign was fought as if there was no need for harshness. Options abounded: an exemption here, a sweetener there and ring-fences being thrown around Whitehall departments faster than barbed wire in a war zone. A £167 billion deficit can be tackled only by raising taxes and cutting spending, and having a vigorous debate on how to generate the sustained growth would provide the revenues to do the rest of the job.
The most unintentionally revealing quote of the past month came from the Tories. Accepting that Cameron’s £150 a year marriage benefit may not be enough to persuade blushing couples to head up the aisle or battered wives to stay with their husbands, a party spokesman talked as if the past two years had not happened. “It’s not the money, it’s the message,” he said. The Britain he imagined, or had to pretend he imagined, was not facing a sovereign debt crisis but was a land of plenty that could still afford eye-catching initiatives and expensive gestures. “The skirmishes over tax and spending that we have seen so far during the campaign hardly reflect the scale of the challenge that will face whatever party has the misfortune to emerge victorious,” said the normally mild-mannered Robert Chote of the Institute of Fiscal Studies as he turned into the Cassandra of public policy research. On top of the cuts and tax rises already announced, the next would have to find £30 billion in savings, the equivalent of twice the police budget or a £1,100 tax increase for every household.
In Wolfgang Becker’s 2003 film Goodbye Lenin, the mother of the East German hero falls into a coma just before the Berlin Wall comes down. By the time she regains consciousness, Germany is heading for reunification and the communist society she knew has vanished. Her doctor tells her son, Alexander Kerner, that he has to keep her calm or risk another stroke.
“You must protect her from any kind of excitement. And I do mean any kind, Mr Kerner,” he says.
“Any kind of excitement?”
“It would be life-threatening.”
“And this here?” [Kerner shows the doctor a newspaper reading: “Good Luck, Germany. Yes to Reunification”] “Wouldn’t you call this exciting?”
So Kerner takes his mother home, and out of fear that reality could kill her, he tells her nothing. To maintain the illusion that history has not moved on, he tours the supermarkets looking for cans bearing the labels of communist brands which no one wants any more, and bribes children to come to her sick room and sing her old party songs. Communism disappears everywhere except in his mother’s flat.
What’s gone is gone: Katrin Sass as the die-hard communist mother in “Goodbye Lenin”
The political class in this election has behaved like Alexander Kerner and treated the voters as if they were sick relatives who needed to be tucked up in bed and kept in quarantine for fear that the shock of Britain’s predicament might kill them. It fed them the old policies, sang the old party songs “Tory Cuts” and “Labour Tax Bombshells” — and behaved as if the world could carry on as it always had done.
The politicians are not entirely to blame. There are millions who don’t want to face reality for reasons I will get to, but no one should be surprised that the established political order struggled in the first election since Lehman Brothers collapsed because the crash took with it the common sense of rival ideologues who thought they had little in common but who all depended on the assumption that finding the money was not a problem when you examined their ideas closely.
The good times that followed the pound’s fall out of the European Exchange Rate Mechanism in 1992 broke every record. In budget after budget, Gordon Brown announced that we had had 40… 50… 60… quarters of continuous economic growth. Globalisation was delivering the goods, and very cheap they were too as China flooded the market and kept down the retail price inflation and the interest rates that tracked it. With Chinese savers pouring their capital into the international markets, money was cheap as well. Britain had no need to worry because although its manufactured goods withered before the competition from the East, it had the City with its apparently assured position in the global financial system. As long ago as the late 1990s, I had heard futurologists predicting that even if in the 21st-century Asia became the world’s manufacturer and Africa its new food basket, Britain would survive and prosper because of its competitive advantage in financial services. I scoffed at the time — Africa’s emergence as an agricultural powerhouse seemed as unlikely then as now — but like so many others over the years, my scepticism was worn down and I had to concede that the City did seem to be driving Britain’s prosperity.
It is commonplace to marvel at how human beings adapt to suffering or how they learn to accept war or deprivation and carry on with their lives. Less widely discussed is how prolonged periods of prosperity change mentalities. The psychology of bubble markets is well understood. From Charles Mackay’s 1841 Extraordinary Popular Delusions and the Madness of Crowds, economic literature has documented herd behaviour in speculative manias. But bubbles are over in a year or so. People rush to buy shares in the South Sea Company or dot.com start-ups. If they’re lucky, they sell them on to “the greater fool” before the bubble bursts and the mania passes. The boom from the mid-1990s through to 2008 wasn’t a spasm in the market or a passing mania but 15 years in which prosperity became so normal that we took it for granted.
To take the statistic closest to the hearts of the British, between 1996 and 2006 the average house price rose by 10.6 per cent per annum (from £62,453 to £179,425). Investing in homes was more profitable than the stock market, which grew at 4.6 per cent per annum and the returns outstripped the 2.6 per cent rise in retail price inflation fourfold. (Ominously for everyone except the young, house prices haven’t fallen back to anything like reasonable levels, and a real property crash remains possible when the Bank of England is forced to stop its emergency help to the economy and raise interest rates.)
New Labour’s dominance of Britain coincided with the long boom. If you think about its time in government as a reaction to an exceptional period, rather than the result of a coherent ideology, then its contradictions become easier to grasp.
Labour has baffled its critics because it remained a left-wing party even though it has abandoned the Left. Conservatives were right to notice the growing power of the State and the stealth taxation. Those leftists who retained an interest in economics — and it was a feature of the success of globalisation during the long boom that most gave up on serious thought about the organisation of society and veered off into culture wars and arguments about identity politics — were equally right to notice how Labour prostrated itself before business and the City. But to Labour ministers the contradictions made sense. It would tax the profits of globalisation and use them to finance the redistribution of wealth and the new schools and hospitals, which will be this government’s most enduring legacy. All governments tax businesses. Social democrats, however, normally retain a suspicion of financial markets. The 1997 Labour government stands out because it lost the centre-Left’s traditional inhibitions. High finance, deregulation and the waving through of mergers and acquisitions worked. Britain seemed to be growing at the expense of its stagnating, over-regulated rivals in Europe.
Looking back on the articles and books I wrote 10 years ago, I still retain a sense of shock at Labour’s gullibility. There was scarcely a dubious business organisation in the world that the former admirers of Karl Marx and R. H. Tawney would not embrace. Margaret Thatcher had banned Arthur Andersen, Enron’s accountants, from receiving government contracts after it had proved to her it was not a business she could trust. Naturally, Gordon Brown welcomed it back to Whitehall, where it would still be receiving taxpayers’ money to this day had it not gone under when Enron went bust. Enron itself sponsored the 1998 Labour conference and persuaded Peter Mandelson to allow it to take over Wessex Water. In this campaign, Labour has made much of the Tory donor Lord Ashcroft’s non-dom status. Few have pointed out that for 15 years, Labour ministers have showered favours, tax exemptions and peerages on foreign billionaires living in London and on British billionaires living in tax havens. The completeness of Labour’s enchantment was so great that it could not do what even its fiercest critics would expect it to do: regulate the banks.
The point now is not to damn Labour but to show why the British centre-Left is so clueless about what to do next. The greatest failure of financial capitalism since 1929 ought to be an opportunity for Labour as it was for Obama and the American Democrats. But rather than face up to it, and by extension to its own failures in government, Labour has been unable to offer a credible banking reform programme or admit that the recession must bring change. Instead, it carries on as if the tax revenues were still rolling in and Fred Goodwin still pushing up the Royal Bank of Scotland’s share price, and it pretends that the old war cries about “increasing investment” and fighting “Tory cuts” still have meaning. The LibDems are in better shape because at least they realised that a long boom built on debt could not be sustained. However, as we saw, they too could not accept the consequences of their insight.
As for the Conservatives, many people noticed an uneasiness about Cameron during the first leadership debate, a nagging fear visible in his flickering eyes and stilted movement that the times may not be propitious after all. If he isn’t nervous, he ought to be. Only the bizarre sight of a centre-left government letting speculators run wild has hidden the problems for the Right. I’ve had an aide to Boris Johnson marvel to me at how in hard times people turn to the State, as if he was having to relearn everything he thought he knew, and gruff leaders of the Tory Right mutter that Cameron’s biggest mistake was not supporting the nationalisation of the banks, as if it were the most natural complaint in the world for a tough-minded Tory to make. The extent of the rethink needed on the Right of politics can be encapsulated in a line. For a generation, Tories have repeated Baroness Thatcher’s acid line: “The trouble with socialism is that eventually you run out of other people’s money.”
After the bailout of the banks, that seems to be the trouble with financial capitalism as well.
In ways we have not yet begun to appreciate, the loss of Britain’s apparently secure position is changing the way we think. Until two years ago, an independent Scotland seemed economically feasible. After the British taxpayer was forced to bail out its largest banks, the idea feels as dead as East German communism. Although Green theory is based on the notion that we must stop putting growth before the interests of the environment, Green practice is dependent on continuing prosperity because alternatives to fossil fuels cannot be generated without public subsidy.
But the biggest change has yet to be felt. The change in the British way of life. Throughout this article, I have talked about booms and prosperity and non-doms as if good fortune was equally shared. But the cuts and the tax rises will fall on a country that is ill-equipped to carry them. Although when George W. Bush was in the White House, it was fashionable to denounce Americans as “stupid white men” guzzling burgers and maxing out their credit cards, the British fitted the stereotype of America better than the Americans themselves. While American household indebtedness reached 140 per cent before the crash, British indebtedness grew to 169 per cent of disposable income — every £1 coming into the average home had to service £1.69 of debt. By 2007, household debts — that is mortgages, loans and credit cards — overtook Britain’s entire domestic product. We like to blame politicians for being spendthrifts who did not think about the future. But the British public as a whole was just as profligate and just as unwilling to accept the consequences.
As the level of debt implies, even in the good years Middle England was not as wealthy a place as metropolitans liked to imagine. The people “who work hard and play by the rules”, whom politicians sought to flatter and court, could never think of sending their children to private schools or benefiting from a cut in inheritance tax. The typical member of the middle class has an income of £30,000. If it reaches the higher-rate tax bracket of 40 per cent, he or she is doing very well (only 3.8 million of Britain’s 31.7 million income tax payers pay the higher rate). Middle England depends on public services and will notice spending cuts because it does not have the choice of going private, and cannot easily cope with tax rises as it has little money to spare.
Below them lies what we used to call the working class and below them the poorest tenth who, as the sociologist Danny Dorling puts it, can never afford a holiday and struggle to find £3 to send their children on a school trip. They are dependent on casual work and the maintenance of the maze of benefits Brown built for them. Shouldn’t they be told that a part of what little they have may vanish? Shouldn’t the working- and middle-classes be drawn into an argument about what should be cut and what should be spared?
This election is going to be looked back on with distaste because there was no adult conversation. The politicians didn’t level with the public and the public didn’t level with itself.
Go back to Robert Chote’s warning about cuts and tax rises being inevitable “whatever party has the misfortune to emerge victorious”. Misfortune is the right word. If you think people are angry with politicians now, you ain’t seen nothing yet.