In less than three months’ time, Ed Miliband could be prime minister. Admit it, conjuring up the mental image of the Labour leader coming in and out of No 10 is tough, even though opinion polls suggest that is the likeliest outcome of the election.
As far as his political opponents are concerned, Miliband should be a dead man walking. The economy is growing and unemployment is falling. Courtesy of falling oil prices, living standards are rising. Labour trail the Conservatives on economic competence. Miliband is seen as a less impressive leader than David Cameron.
Over the next three months, Miliband will stand accused by the Tories of not being up to the job of governing Britain. It will be said he was part of Gordon Brown’s inner circle when the last Labour government laid waste to the economy; that he opposed the deficit reduction plan needed to clear up the mess that Labour made; that he forgot to mention the deficit at all in his last conference speech; that if he has an economic plan it is to return Britain to the 1970s. That’s the case for the prosecution. Here’s the case for the defence.
In the past 36 years there have been only three changes of government: in 1979, in 1997 and in 2010. On each occasion, defeat for the ruling party followed a big and politically adverse economic shock. Labour’s defeat in 1979 came after the 1976 IMF bail-out and the winter of discontent; John Major never shrugged off the loss of competence associated with Black Wednesday in September 1992. The most severe recession of the entire post-war period did for Brown.
In the absence of national economic humiliations, the evidence is that voters stick with the status quo. Miliband is doing well even to be in with a chance of propelling Labour back to power at the first time of asking.
Now let’s look at the economic charge sheet brought against Labour. It has become received wisdom that the profligacy of Brown led to the near collapse of the banking system and the deep recession that followed. This is not supported by the evidence. What happened was that a systemic financial crisis paralysed the entire global economy, leading to a collapse in tax revenues. Had governments tried to balance the books by raising taxes or cutting spending there would have been a second Great Depression. Instead, they allowed the public finances to take the strain. In Britain, the budget deficit rose from 2% of national output before the crisis to 11% by the time Labour left office.
The second charge against Labour is that it is the party of deficit deniers. In fact, the shadow chancellor Ed Balls was one of the very few at Westminster to warn that George Osborne’s shock treatment in 2010 risked leading to slower growth and a bigger deficit. This is precisely what happened. The coalition government took an economy slowly on the mend and snuffed out recovery with cuts in infrastructure spending and an increase in VAT. A phoney comparison between Britain and Greece flattened business and consumer confidence.
Far from being deficit deniers, Labour understood that the way to get the deficit down is to get the economy growing first. Osborne eventually twigged in 2012, when he quietly abandoned his original budget targets and concentrated on getting the economy moving instead. He gave up on the idea of eliminating the deficit in one term and reverted to the plan that he had inherited from Alastair Darling.
For Osborne and his cheerleaders in the press, the end of the period of economic flat-lining in early 2013 was evidence that he had been right and Labour wrong. But Balls and Miliband had never said that Osborne’s fiscal straight jacket would mean the economy would never grow again; merely that recovery would be delayed and that there would be a heavy price to pay. That’s certainly true. Simon Wren-Lewis, economics professor at Oxford University, says the permanent loss of output caused by Osborne’s experiment has cost Britain £100bn at least.
The chancellor is, apparently, bent on repeating the experiment if the Tories win the election. Deep cuts in public spending and in welfare are planned in the early years of the next parliament so that the Treasury can run an overall budget surplus. Labour has said it wants tax receipts to cover the day-to-day spending of government as soon as possible but that it would be prepared to borrow to invest. This makes quite a difference to spending plans. The Institute for Fiscal Studies says that it would involve Labour borrowing around £25bn more than envisaged by Osborne, and that the gap between the parties on tax and spending policy is the biggest it has been since 1992.
Miliband’s task in the coming months is to show voters that he would use this extra borrowing to help reshape and modernise the economy. One valid criticism of Labour is that it left office after 13 years with the economy more unbalanced, but there has been no improvement on Osborne’s watch. Manufacturing output has still not recovered to its pre-recession levels and the current account deficit – the sum of the trade deficit and investment flows – is the highest on record at 6% of national output. The recovery only really began when the Treasury and the Bank of England reignited the housing market.
What’s more, Miliband is right to highlight the defects of capitalism British-style. There are two reasons why the deficit is forecast to be more than £90bn this year, rather than the £37bn envisaged when Osborne became chancellor in 2010. The first is that two years were wasted; the second is that the expansion of low-paid work means the fall in unemployment has not been matched by a rise in income tax receipts.
The recent increases in real wages have come late and voters are worse off now than they were in 2010. What’s more, the HSBC tax scandal is reinforcing the impression that there is one law for the wealthy and one law for everybody else. The real reason business leaders rail against Miliband has nothing to do with energy-price freezes or tougher banking regulations: it is because they fear they will have to pay more tax. Labour’s plans to cut business rates and for a properly funded British Investment Bank suggest that it is not anti-enterprise, merely anti the self-seeking behaviour too often found in Britain’s boardrooms.
One final point is worth making. As the election has approached, the Conservative party has closed ranks behind the prime minister. It knows who the real enemy is. Miliband has had to make his case amid constant sniping from his own ranks. His internal critics might like to consider not what he has got wrong but what he has got right.
This article was written by Larry Elliott Economics editor, for theguardian.com on Sunday 15th February 2015 13.11 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010