David Cameron Will Regret His Spending Pledges

Is it there yet? Can you sense it? Have the Conservatives managed to conjure from somewhere that all-important ingredient for electoral success? I’m referring, of course, to the failsafe elixir of vote-gathering, that vital campaigning tool – the feel-good factor.

The British economy, we’re repeatedly told, is booming. We live in the fastest-growing nation in Western Europe, with the UK expanding by 2.8pc last year, the quickest pace since 2006. National income per head is now almost 5pc higher than in 2010, when the last general election was held. Launching his party’s manifesto last week, David Cameron did his best to generate a rhetorical feel-good factor. The Tories’ goal over the next five years, he exclaimed, is to “turn the good news on our economy into a good life for you and your family”.

This particular “good life” amounts not to a garden smallholding in Surbiton (younger readers type “Felicity Kendal” into a search engine). Cameron was offering, instead, affordable homes, more free childcare and lower taxes. The Conservatives are “the party of working people”, he argued, pledging to give 1.3m families the chance to buy their housing association home at a discount. The Tories also vowed to freeze rail fares for five years, introduce an income tax-free minimum wage and scrap inheritance tax on homes worth up to £1m.

Unsurprisingly, Labour and the Liberal Democrats dismissed these pledges as “totally unfunded” and “a con” – not least because that’s what they were. By throwing around billions of pounds of spending promises without saying how they’d be paid for, the Tories undermined their strongest suit. There’s no strategic benefit in giving Ed Miliband the opportunity to present himself as a paragon of fiscal virtue. And there’s certainly no feel-good factor in telling voters you’ll give them something they instinctively know you can’t.

It’s true the British economy is improving. Last week the International Monetary Fund, having previously chided the UK, gave us a much-improved report card. Growth should remain steady at 2.7pc next year, the IMF said, with unemployment falling from 6.1pc to 5.4pc.

Last week’s news that consumer price inflation was zero during the year to March, largely due to the lower cost of oil and food imports, also allowed the Tories to counter Labour’s taunts about “the cost-of-living crisis”. This lack of price pressure, in addition, makes it less likely the Bank of England will raise interest rates over the coming months – granting a further reprieve to heavily-indebted households and firms.

Despite all that, the feel-good factor remains strangely elusive. That’s precisely why Cameron felt the need to stress “the good news on the economy” – because so many of us haven’t noticed it in our lives. One reason is that, while national income is now about 2pc bigger than it was in mid-2008, just before the financial crisis, GDP per head remains lower once you factor in a 4pc population rise. This failure of incomes to fully recover, in turn, is explained by falling real wages. Average pay has gone up a bit since before the credit crunch, but that increase has been more than wiped-out by inflation. That’s why, in today’s prices, average weekly wages are down from £540 in early 2008 to £480 now. No feel-good factor there, certainly not if you’re anywhere near the average.

Consider, also, that while UK house prices have recovered since the crash, and are up 11pc nationwide, that increase has been driven by the 35pc rise in London. Outside of the South East, the recovery has been decidedly patchy. In six out of nine UK regions, in fact, house prices remain lower than they were six years ago – in some cases over 20pc lower. That explains why millions of households still aren’t “feeling good” about their economic circumstances.

While prices remain subdued in some areas, falling pay and a lack of job security still puts the dream of property ownership beyond the reach of millions of young adults – crushing their feel-good factor, and also that of their parents. That will remain true, as long as Britain continues to build too few houses.

Preliminary figures suggest almost 141,000 homes were completed across the UK last year – up 4pc on the year before. Yet even that higher figure remains 36pc below the 219,000 built in 2007/08. And that number, in turn, is well short of the 250,000-plus dwellings we need annually, just to keep up with current demographic trends.

Every post-War UK recovery has been associated with a surge in house building, boosting the construction industry and providing affordable homes for aspirational families, while absorbing immigrant workers. These processes spread wealth and confidence, while energizing our labour force and entrenching the economic upturn.

This latest recovery, in contrast, has brought falling home ownership, spiraling inequality, continued economic despondency and a nationally uncharacteristic resentment towards hard-working immigrants. The UK housing market, for decades an engine of social mobility and economic security, has become instead a source of social exclusion and economic angst – not least as supply has stalled. And that goes a long way towards explaining the lack of a widespread feel-good factor.

On top of all that, while the IMF forecast of continued British economic buoyancy may be right, it may also turn out to be wrong. Beyond the headline forecast of a “solid UK recovery”, the fine-print of the IMF’s report concedes that while “continued steady growth is expected”, it depends on or is at least “supported by” two key factors – “lower oil prices and improved financial market conditions”.

I’d say that both these assumptions are a very long way from “solid”. Having surged some 40pc since mid-January, oil prices hit fresh 2015 peaks last Thursday, and are now consistently above $60 a barrel. This latest rise reflects the escalating conflict in Yemen, raising concerns about neighboring Saudi Arabia. The growth of US crude inventories has also slowed to a trickle, the latest data show, as the Opec exporters’ cartel continues to squeeze American shale producers – part of a concerted bid to knock them out of action, before ramping crude prices back up.

Then there’s the somewhat tricky question of financial stability. It gives me no pleasure to write this, but it is palpably obvious that the threats to the UK’s financial stability are legion. For one thing, our recovery rests on a pyramid of debt – with personal indebtedness now above £1,400bn, an all-time high. British government debt, meanwhile, at least the share of it that’s on the books, is now pushing £1,600bn – having more than doubled since the credit crunch.

We’re meanwhile running an external deficit equal to 5.5pc of national income, the biggest import-export shortfall for almost 70 years. These ghastly economic realities make the UK extremely vulnerable to interest rate rises and systemic instability. And potential sources of such instability are all around us.

As Athens teeters on the brink of default (again), yields on Greek bonds soared last week as its creditors begin to lose patience – raising the chances of a eurozone meltdown. The showdown between Ukraine and its creditors – even more ideologically charged than that between Athens and Brussels – could also turn nasty, again risking a sovereign default on the edge of Europe, a event that could become another “Lehman moment”.

A courageous political leader would explain such dangers, stressing the need for continued spending restraint and for Britain to cut its debts. Yet Cameron last week joined the campaigning fray, banning serious discussion and indulging, instead, in deluded spending promises. Voters will punish him for it.


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