One lesson for Labour

The first Conservative budget since 1996 illustrated one lesson for Labour: how important it is to establish and maintain economic credibility.

The chancellor’s March budget, for the Conservative-Liberal Democrat coalition government, stated that annual borrowing would be eliminated by 2018-19, mainly through harsh spending cuts including a £12bn cut to welfare spending. The Conservative manifesto went further, promising to eliminate all borrowing within the parliament and promising even harsher cuts. Yet George Osborne has done something different in this budget. Fiscal policy will overall be looser with a deficit until 2019-20, one year later than planned under the coalition, though some spending cuts have been brought forward and asset sales help offset borrowing. Compared with those previous plans, spending will be £83bn higher. The government has found its social security cuts, but these will be implemented over a longer period. The government can also rely on higher tax revenues. It has raised taxes, including bizarrely applying the climate change levy to renewable energy, and the Office for Budget Responsibility has revised up its forecasts for tax receipts.

Alongside quite severe cuts to social security, mainly affecting the working poor rather than those without work, the chancellor audaciously announced that companies would have to pay a national minimum wage for over 25s of over £9 per hour by 2019-20. This, he claimed, would help reduce dependency on welfare as pay increased.

One can imagine that even now university tutorials are being prepared outlining how Ed Miliband was in fact correct! A higher minimum wage has now become part of the consensus, it will be argued. Energy prices are being more tightly regulated. Deficit reduction is proceeding at a slower pace. Perhaps in some fashion Labour ‘won’ the arguments in May … but just happened to lose the election. For that, a combination of the media and the Scottish Nationalist party can be blamed. Indeed, I am struck how some of those who had expected to be in government by now still believe we had the right economic policies but lost because somehow we were bad at communicating them.

It won’t wash. Such a view would be incredibly naive. For a start, this budget was highly political and socially divisive. The higher minimum wage will be worth only £4bn according to the OBR, which contrasts poorly with the amount of social security cuts. It is not, of course, without cost since consumers and shareholders will pay. Furthermore, those seeing their tax credits cut are unlikely to be all the same people benefiting from the higher wages and the cuts come soon whilst the wage increase is phased in. Government departments will still see real terms spending cuts between 2015-16 and 2019-20. Assuming spending on the NHS, overseas aid, education, and defence is protected, the Institute for Fiscal Studies estimates other departments will see spending cut 12.6 per cent, which would amount to a 32.8 per cent cut since 2010-11. The budget points in an apparently more progressive direction while aggressively pursuing a smaller state strategy.

More importantly, the central fact is that Labour did not win. The voters were not convinced. The budget was a very good lesson about how important it is to be economically credible with the electorate and markets. Osborne was able to slow the planned pace of spending cuts because the battle for economic credibility was won years before the election. Few people are complaining that he has broken his promise of even deeper cuts. What does being credible mean? It means being trusted to manage the economy better than the other guys, having a fiscal plan that markets believe in and a policy voters find more relevant to their concerns. However, being credible should not be about cynically gaining political capital to be undermined at leisure. This is Osborne’s approach and it reinforces voter despair with politics.

Despite another growth plan announced today, the Conservative party has yet to fully grasp the challenges that face the United Kingdom economy over the next five to 10 years. Labour should have done so through the years of coalition. We still have the responsibility, and opportunity, to do so.