David Cameron has shown his hand – austerity is really all about shrinking the size of the state

Gone are the days of hug-a-hoody compassionate conservatism populism

Share

The cat is finally out of the bag. The cuts are here to stay because David Cameron and George Osborne like them. They make them feel all warm and cuddly to know they are shrinking the state and bashing all those scroungers who depend on a helping hand.

What better place for Cameron to tell us that than in front of a gold throne at the Lord Mayor’s banquet last week, dressed in his white tie? Also last week Iain Duncan Smith, the Work and Pensions Secretary, didn’t even bother to show up to the House of Commons to debate the much-hated bedroom tax. Gone are the days of hug-a-hoody and compassionate conservative populism. The Tories even tried to airbrush records of earlier speeches from the internet. They don’t want us to remember that the Tory party once pretended to have a conscience. Well, they can run, but they can’t hide.

The public seem to have worked out that things on their street, especially when they live outside London, isn’t that great, which may well explain why the Labour Party is surging again in the polls. YouGov had polls last week with a couple of 8-point leads as well as one with a 10-point lead, while Ed Miliband seems has overtaken the Prime Minister in most categories.

On the face of it, this does look like a bit of a surprise, given the most recent pretty good news on the economy, which showed the UK had a very fast last lap in the global race. But sadly we are still well down the field, having been lapped several times over the past two years, in output terms, by Australia, Canada, Iceland, Japan, Luxembourg, New Zealand, Norway, Sweden, Switzerland and the United States.

The key seems to be living standards. The price of energy is rising. Energy companies are lifting prices way above the inflation rate, which, to the surprise of everyone, fell faster than was expected, to 2.2 per cent from 2.7 per cent (of which 0.8 per cent was down to administrative price rises). This is despite the fact that oil prices around the world are tumbling. Mr Miliband has struck a popular theme that the electricity companies seem to be gouging.

It was a bit of a surprise to me, I have to say, that the unemployment rate fell this month. We already had a 7.4 per cent, a 7.7 per cent and an 8.0 per cent from the single-month data. The 7.4 was dropped and replaced with a 7.1 per cent, which is the lowest number since February 2009, as the economy was charging into recession.

The numbers allowed the Bank’s Monetary Policy Committee (MPC) to improve its forecast for when unemployment will hit 7 per cent. The chance that unemployment will reach 7 per cent by the end of next year is now estimated by the MPC at two in five, rising to three in five by the end of 2015.

David Cameron at the Lord Mayor's banquet, where he called for a permanent culture of austerity

 

 

 

 

 

 

 

 

The MPC has not said that the Bank Rate will definitely be raised at that point, but simply that they will review the situation; Governor Carney at the Inflation Report press conference last week warned that the unemployment rate of 7 per cent was a threshold, not a trigger.

As the external MPC member Martin Weale made clear in a speech this week*, the date that interest rates will rise is not a done deal. It is also conceivable that they will do more asset purchases if the economy slows. “It is perfectly possible,” Mr Weale said, “that, as time moves on, the right thing to do will be to keep the Bank Rate at 0.5 per cent even when unemployment has dropped below our 7 per cent threshold. As my colleagues have explained, a rise is not automatic. We will do what we have always done; look at the state of the economy and take the most appropriate decision in the light of that… the MPC will undertake further asset purchases if they are called for.” The MPC still believes there is a large degree of spare capacity in the economy, with falling inflation. Interest rates will be on hold for many years, probably until 2020, primarily because of the sensitivity of the UK economy to an interest-rate rise.

I arrived in the UK last Tuesday to find adverts for mortgages at 1.49 per cent above Base Rate with a low fee. A rate rise would decimate many mortgage holders who would see their repayments rise. House prices and consumption would both inevitably fall and unemployment would rise. As Mark Carney said at his press conference, “nobody is talking about raising rates today, that would be foolish”. Indeed it would.

So where is this growth going to come from? The four components of growth are investment, trade, consumption and government, and it’s hard to pick a big driver. Net trade still continues to lower, not raise, growth and there is little prospect of any improvement in exports any time soon, especially as China and the eurozone are both slowing.

There is also no evidence that firms are rushing out to invest, not least because of the uncertainties surrounding possible UK exit from the EU. Government spending is making a small contribution as deficit reduction has stalled, but we know there is a further round of cuts coming that Cameron and Slasher Osborne love so much. So in the medium term that is also likely to detract from growth.

That leaves the good old consumer, and there are even doubts about their enthusiasm, given the fall in retail sales of 0.7 per cent on the month.

The fact that consumption hasn’t taken off yet is hardly surprising, given that regular pay growth, excluding bonuses, measured as the average of the last three months over the same period a year ago, fell again to 0.8 per cent, down from 1.8 per cent a year ago. In the private sector it was 1.1 per cent, while in the public sector wages fell by 0.1 per cent, so real living standards of workers are declining apace. The chart (left) shows the broader picture of falling real wages and crushed living standards.

The Government-engineered house price boom seems to have encouraged folks to start borrowing and dissaving, mostly in the South-east and London. I have my fingers crossed this is all going to turn out well for the country. I suspect Mr Carney is really going to have to earn his big salary all too soon.

*“Monetary policy-making and forward guidance.” Speech by Martin Weale at Quintin Kynaston Community Academy, Friday 15 November 2013.

React Now

iJobs Job Widget
iJobs General

Apprentice IT Technician

£150.00 per week: QA Apprenticeships: This company is a company that specializ...

1st Line Technical Service Desk Analyst IT Apprentice

£153.75 per week: QA Apprenticeships: This company is an innovative outsourcin...

1st Line Helpdesk Engineer Apprentice

£150.00 per week: QA Apprenticeships: This company has been providing on site ...

Sales Associate Apprentice

£150.00 per week: QA Apprenticeships: We've been supplying best of breed peopl...

Day In a Page

Read Next
‘Would Gary Lineker depart if his pay were halved, and would it affect the quality of MoTD?’  

BBC Me – no Archers, and no Fiona Bruce

DJ Taylor
Feeling the heat: David Cameron last week in Lanzarote  

The parable of the PM and the jellyfish

Joan Smith
How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

How I brokered a peace deal with Robert Mugabe

Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

British Muslims's Happy video attacked as 'sinful'

The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

Michael Williams: Do as I do, not as I pray

Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

A History of the First World War in 100 moments

A visit to the Front Line by the Prime Minister's wife
Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

Jenny Collier: 'Sexism on stand-up circuit should be extinct'

The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

Cannes Film Festival

Ken Loach and Mike Leigh to fight it out for the Palme d'Or
The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

The concept album makes surprise top ten return

Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

Lichen is surprise new ingredient on fine-dining menus

Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
10 best baking books

10 best baking books

Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
Jury still out on Manchester City boss Manuel Pellegrini

Jury still out on Pellegrini

Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players
Ben Stokes: 'Punching lockers isn't way forward'

Ben Stokes: 'Punching lockers isn't way forward'

The all-rounder has been hailed as future star after Ashes debut but incident in Caribbean added to doubts about discipline. Jon Culley meets a man looking to control his emotions
Mark Johnston: First £1 million jackpot spurs him on

Mark Johnston: First £1 million jackpot spurs him on

The most prize money ever at an All-Weather race day is up for grabs at Lingfield on Friday, and the record-breaking trainer tells Jon Freeman how times have changed
Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

Ricky Gervais: 'People are waiting for me to fail'

As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

Mad Men returns for a final fling

The suits are still sharp, but Don Draper has lost his edge
Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

Google finds a lift into space will never get off the ground

Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit