Even the most unobservant of us will have noticed that a general election campaign has begun. One of the functions of a fixed five-year parliament with a set date for the election, is a much longer period of political debate. So, it is in the self-interest of the parties to use this time to differentiate themselves, just as any seller of goods or services does, even if the products are pretty much the same. Of course, the emphasis is different – how could it not be? – but the economic propositions of the three major parties are actually much more similar than in previous elections.
There has to date, however, been one glaring omission: what policies do the parties have in the event of there being another global recession in the life of the next parliament? Given the ebb and flow of the business cycle in the past, that must be at least an evens, or I am afraid more probably, an odds-on bet. So, the focus of debate is about the minutiae, the things that don't really matter much, rather than on the one thing that really does matter, which is how prepared our government will be for the next downturn.
Is it fair to say that the debate is about minutiae? Well, judge for yourself. There is really no debate at all about the overall spending level for the first two years of the next parliament, for the Opposition has said it will, initially, stick to the spending target of the coalition. There will be some reallocation between programmes, and some increase in spending on the NHS is promised by Labour. But the numbers are well within the uncertainties of public finance.
As for the final three years of the parliament, we have not had any clear projections of spending but from what is being said there is a difference of emphasis. In a nutshell, the Conservatives propose to stick to the coalition's present plans, while Labour feels these are unachievable. As far as I understand, so too do the Liberal Democrats, despite their cooperation in framing the plans. You have to be sceptical certainly, but the latest Office for Budget Responsibility (OBR) projections for public spending show that in the penultimate year of the present plans, at 36 per cent of GDP, it would be the same as that achieved by Gordon Brown in his first term as Chancellor and of Tory governments in the mid-1950s. Maybe that level of spending would prove unsustainably low in the long term, but it is not completely outlandish.
On the tax side the differences are tiny. Labour's mansion tax might raise a couple of billion but if it resulted in lower top-end house prices and fewer transactions, the loss of stamp duty revenues might mean there would be a net loss of revenue. Tory tax cuts might cost a few billion but might actually increase revenue if they resulted in more economic activity.
The harsh truth is that tax revenues, excluding North Sea oil, have been stable at 32-34 per cent of GDP since the 1970s. Add in other non-tax revenues, and something for oil, and you can get to about 37 per cent of GDP. Unless you believe the next government can pull in more tax than any government has for the past 45 years, that is what the next government will have to play with.
It would be helpful to have an independent audit of all major parties' plans from the OBR, or if that were difficult given its status, from the Institute for Fiscal Studies. I expect we will get that. I don't think we should kid ourselves that such an audit will tell us much that is new, but if it reminds all politicians of the maths of public finance, then it is worth doing.
The big issue is growth. We are all prisoners of the global cycle. There is a perception that the last dip was exceptionally deep and the recovery exceptionally weak. For the developed world as a whole that is broadly true. But for Britain, it wasn't. As the revisions to the stats come in, and allowing for swings in North Sea oil, it is now clear that the last recession and the present recovery are broadly similar to the 1980s recession and recovery. It was nasty, but just about within the limits of our post-war experience.
The world economy, or rather the developed world, seems locked into a 10-year economic cycle, maybe a little shorter. The bottom of the last cycle was 2008/9, so it's reasonable to expect the next downturn to come around 2018 – in the second half of the next parliament. I suppose I would expect the downturn to be not too bad, given that we have just had a really nasty one. After all, the early 2000s dip was barely noticed, which you could say lulled us into complacency. (In the spirit of disclosure, while I got the timing of the last downturn spot on, I got the magnitude wrong.)
A sensible working assumption is that there will be a global downturn in about three years' time, but not too bad a one. So, politicians, how do you propose to get us into shape for that?Reuse content