Forget the old feuds and save the economy
Wednesday 30 December 1998
The general consensus amongst colleagues I spoke to was that the recent debt-settling has been so damaging to the Government as a whole, that everyone may now draw a line under the events of the past. I fear my colleagues are allowing their wishes to cloud their critical faculties. My clearest lesson in how long people can hold a grudge dates back to 1971 when, as a newly elected Lambeth councillor, I sat next to Minnie Kidd, an old time right winger from Clapham Labour Party. I can no longer remember what minor position was the subject of contention but I was amazed to see that Minnie Kidd was voting for the left wing candidate against an equally old right winger who was also from Clapham Labour Party. When I challenged her on her remarkable bit of cross voting she replied with hard determination: "He didn't vote for me to go to Labour Party conference in 1935!" If you're still settling scores over who didn't go to Labour Party conference 36 years on then I suspect the fall-out from Tony Blair's election as Labour leader may be with us for a generation or two yet.
For me the most appalling aspect of this whole affair is the amount of energy that has been put into party in-fighting to the neglect of the real duty of getting macro economic policy right. When I compare the amount of effort that must have gone into the events before Christmas with the inadequacy that underlies the Treasury pre-Budget report I get quite angry.
The pre-Budget report claims that the economy will grow by between 1 to 1.5 per cent based on an increase in personal and household consumption of between 1.75-2.25 per cent in 1999. The report presumes that the economic slow-down will not lead to an increase in the level of unemployment sufficient to put downward pressure on the growth of real wages. Whilst this may be optimistic, the Government can always affect individual income via tax changes and social transfers so in principle this target could be achieved. The real error in the Budget forecast is in the area the Government cannot control, such as trade, and will not control - investment. Brown's report predicts that fixed investment will rise from between 1.75-2.25 per cent next year. This is just rubbish. It simply is not credible to suggest that fixed investment will grow almost twice as rapidly as GDP [gross domestic product] as it is one of the clearest features of the business cycle that fluctuations in investment are greater than those in GDP. Fixed investment invariably rises much faster than GDP during the upswing of the business cycle and falls more rapidly during the downswing. As we are clearly in the downswing of the business cycle, fixed investment will rise even less than GDP in the coming year. In fact, the figures had already turned downwards by the second quarter of 1998 - declining by 1.4 per cent compared with the first quarter.
If Gordon Brown's advisors are unaware of the basic relationship between investment and GDP, they are even less well informed on the question of the impact of trade on Britain. Gordon's report claimed that the worsening of Britain's trade gap will only cut 1.25 per cent from our GDP in 1999. Up until the second quarter of 1998, exports of British goods and services rose by 4 per cent, but this was a dramatic decline from the peak of 9.5 per cent in the third quarter of 1997, following the impact of high interest rates and an overvalued pound; the surge of cheap imports from Asia, as well as the slow-down in the whole global economy.
Unfortunately for Gordon's predictions the decline of the value of the pound has been too slow due to continuing high interest rates. This reflects the Treasury's failure to sufficiently tighten fiscal policy in the Government's first year, so putting pressure on the Bank of England to force up interest rates.
Taking all these factors, along with a sharper deceleration in world GDP, it is clear that Gordon's predictions for GDP are too optimistic for both investment and trade. Even if we make the optimistic assumption that fixed investment is merely flat in 1999 and that the deterioration of net trade is 1 per cent of GDP, then this gives GDP growth for next year of zero. But the risk is on the downside. It is more likely that fixed investment will fall and that net trade will deteriorate more rapidly than Gordon expects. If this is the case then the economy will slip into recession. But if there is a more rapid than expected recovery in Asia and Japan these figures would improve, but equally a devaluation in China or Brazil, or a collapse on Wall Street, would dramatically worsen these figures.
Declining investment will lethally undermine our welfare-to-work programme and even the optimistic scenario of zero growth could mean the loss of up to 2,000 seats on Labour councils in May if the downswing reaches its low point before the local elections. We are handing our opponents for the Welsh and Scottish elections a dagger aimed at our heartlands.
My prediction for 1999 is that on the morning of Friday, 7 May defeated Labour candidates all over Britain will be colourfully expressing the view that a bit more effort should have gone into getting the British economy right, and a little less into pursuing the feuds of leadership battles past.
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