It’s the politics of the economy, Stupid

By Duncan Weldon

As one would expect, given the severity of the current downturn, the economy has become the dominant the factor in political discourse over the past year. However most of the debate has revolved around the issue of how the different parties would deal with the recession, rather than how the different parties will deal with the aftermath of the recession.

This distinction is vitally important. I worry that the next election will, in effect, be fought along the lines of how the recession has been handled (‘our stimulus helped end the recession, the Tories opposed it’, ‘Labour have run up a massive national debt’, etc).

As I have made pretty clear on my blog, I think the general direction of Labour policy has been right, although personally I would have preferred a larger fiscal stimulus. I think the Tory arguments have been incorrect and would worsen and lengthen the downturn. But this is a debate over economics, not politics. Obviously my preferred economic policies are coloured by my politics, and no doubt the views of Tories are coloured by their own. But I think, in many cases, the real politics have been removed from the discussion.

In any debate over how we deal with the post-recession world, then politics are vital.

I don’t think post-recession Britain looks like pre-recession Britain. I think growth, in the absence of easily available credit, is structurally lower. I think the economy has to be rebalanced away from finance and property. I suspect we will need to focus on areas of strength: pharmaceuticals, advanced manufacturing, communications technology, green technology and aerospace. This will probably require a more active industrial policy than we have had for decades.

Regardless of what I think, there is one certainty. We will have to deal with a large national debt and the question of how best to:

i) balance the budget over the medium term

and

ii) pay down debt over the longer term.

Increasingly I am hearing people, on both sides of the aisle, talk about the need for a consensus on how we handle the economy and ‘sort out the public finances’. There have even been calls for governments of national unity. Against the economic backdrop I expect to see, these calls are both wrong and dangerous.

To achieve a balanced budget and debt repayments will require either very large tax rises or equally large public spending cuts, or some combination of the two. It’s not simply a case of cutting ‘unnecessary projects’ (insert as desired: Trident renewal, ID cards, quango spending, public sector ‘fat cats’) or ‘taxing the rich’. The magnitude of the decisions that will need to be taken is hard to understate.

And these sort of decisions are political decisions that cannot be left to technocrats and consensus. Tax rises or spending cuts, what is the appropriate balance? If we cut spending, what is cut? If we raise taxes, who pays? These are political decisions. Driven by an economic necessity maybe, but political decisions nonetheless.

These sort of questions will dominate British government for the next decade and Labour needs to be ready. These are the grounds on which the next general election must be fought.