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The local election results show the Conservatives can win votes even as they slash Britons' living standards
George Osborne can hardly believe his luck. A year ago, the bailout of Greece by the European Union and International Monetary Fund (IMF) gave the chancellor perfect cover for his deficit-reduction plan. The message was clear: either the UK gets a grip on its public finances immediately or it too will be in the firing line.
A year later, austerity is not working and Greece is again in crisis. Growth has been so hobbled by spending cuts and tax increases that public debt levels are heading for the unsustainable level of 200% of national output. A secret meeting involving finance ministers from a selective group of eurozone countries spent the weekend running through options for Greece, including such as easing the repayment terms on its loans, providing a second bailout and debt restructuring. Departure from the single currency was not on the agenda, but it is being openly discussed in the financial markets.
This is all mightily convenient for Osborne. He took an economy that was growing at an annual rate in excess of 4% last spring and within six months managed to bring it to a standstill. Impressively, he did so not through tax rises and spending cuts – which were then quite modest – but through repeated warnings about just how tough life was going to be once the coalition really started to hack away at the deficit. Consumer confidence, predictably, has collapsed and although many businesses are sitting on piles of cash after cutting costs aggressively during the recession, they are hoarding rather than investing.
To the extent that Britain is like Greece, it is that slower growth is making it harder to get borrowing down. In all other respects, the comparison does not bear scrutiny, not least because the UK is outside the eurozone and thus has the advantage of a floating exchange rate. But Osborne has been able to use the crisis in the eurozone to justify what he has been doing at home, and he was at it again yesterday, combining an avowed reluctance for the UK to be involved in a second Greek bailout with the warning that it would be a disaster should the government backtrack on its deficit-reduction plans now.
The chancellor has lots of cover for this line of argument. He can wheel out support from the IMF and the Organisation for Economic Co-operation and Development for his austerity programme. Most of the media at home, including the BBC, are fully signed up to fiscal orthodoxy and accept without question the Thatcherite insistence that There Is No Alternative to hacking 1.5% of demand out of the economy in each of the next for four years.
Last week's election results suggest that the strategy is paying off, politically at least. Britain's recovery from the 2008-09 slump is painfully weak by historic standards, and there is a clear risk of a double-dip recession. Last week the National Institute for Economic and Social Research said it would take until 2013 for output to return to 2008 levels and that the targets for deficit reduction would be missed. There is no Plan B.
Spending power
The Conservative performance is even more impressive, given what is happening to living standards. You have to go back to the early 1980s to find a time when the spending power of the average Briton fell from one year to the next. That was when factories were closing in droves, unemployment was nearing three million and inner cities were on fire. It is even rarer for the squeeze to last for two years, with only two instances of it occurring in the post-war era.
Both times – the mid-1970s stagflation that forced the Labour government to seek help from the IMF and the early 1980s, when Thatcher was administering monetarist shock treatment to the economy – the ruling party plummeted in popularity. NIESR predicts that 2010 and 2011 will see the first back-to-back declines in real personal disposable income for three decades, yet the Tories won more seats in the English local elections last week than they did when they were last fought in 2007.
Real personal disposable income sounds like typical economics jargon but measures how far an individual's income stretches once allowance has been made for inflation and for taxation. In the past year, inflation has been higher than wage growth and taxes have gone up: hence the fall in RPDI. At present, the only way the average individual can maintain their spending patterns is to run down savings or borrow more, neither of which is likely when there is concern about public-sector job cuts and the weak housing market rules out using the house as a cash machine.
Arguably, this is no bad thing. A bit of frugality would be good for the planet. But over many decades there has been a simple political equation: weak or falling RPDI equals trouble. . At the moment, the bigger half of the ruling coalition is bucking this trend, with Labour making little headway in the swing seats of the south-east, where voters tend to be quite sensitive to changes in real income. It often takes time for individuals to register that the economy as a whole is slowing down, but they tend to realise pretty quickly when they feel worse off than a year ago.
Why are they not giving Osborne a good kicking then? Simple: they think Labour's so-called boom was based on the unsteady foundations of excessive debt and speculation (true); that Labour mismanaged the crisis and left the country on the brink of bankruptcy (untrue); and that if Labour was in power now it would be following broadly the same policy as the coalition (not quite true, but only political anoraks can really spot the difference).
Changing this perception will be hard. For Miliband, stage one of the process is to embed the idea that the coalition is screwing up the economy. Stage two is to show that Labour would reduce the deficit in a different way (perhaps with a totemic policy aimed at job creation, such as a cut in national insurance contributions). Stage three is a plan for growth that does not mean conniving in excessive property speculation and genuflection to the City, but uses the state-controlled banks as vehicles for productive investment in industry and housing. Stage four involves policies to increase wages and cut taxes of the squeezed middle.
Some of this, to be fair, is work in process, but it is work at a very early stage. Meanwhile, the Tories will be quite happy to see Labour give the Liberal Democrats a good kicking in the north provided they keep their stranglehold south of a line drawn from the Severn estuary to the Wash. The first two years of this parliament were always going to be tough, but Osborne has managed to get the Conservatives through half that period with their support intact. Given the economic backdrop, that is quite a political achievement.