The Liberal Democrat challenges for 2011: the economy

Over the festive season I’m running a series of posts on the main Liberal Democrat challenges for 2011. You can find all the posts in the series here.

The state of the economy is central to the fate of the Liberal Democrats, both because it is so important in shaping people’s perceptions of the government and also because the better the economy does the more scope there is to get public interest in Liberal Democrat achievements in other areas. No matter how wonderful the government’s green achievements, for example, they would get very little attention in the midst of a double-dip recession.

Three figures are likely to sum up the economy’s state over the next 12 months. First, the quarterly GDP growth figures. These figures are given far more media attention and political weight than their accuracy – or rather inaccuracy – deserves as the final figures which come out months after the initial estimates are often significantly different. However, whilst preliminary figures of +0.1 and -0.1 might sensibly be judged to be little different given the errors in such numbers, the political and media impact of even such a small difference would be huge.

Second, the deficit figures. Despite the sizeable gap between the latest deficit figures and most people’s own day-to-day circumstances, it has become the dominant political explanation for the government’s actions – and the coalition has won the political battle to persuade the public that major action was required to bring it down. But to have a chance of political credit as the reality of such action bites, overall deficit reduction has to be seen to be happening.

Third, real wages growth (or not). Weak real wages growth has often been the explanation as to why a government doing well on other economic indicators has still lagged in popularity. Likewise, strong real wages growth has often lifted government popularity despite other political troubles. Real wages are generally forecast to fall over the next year; slowing down and then reversing that decline will be vital for the public to feel that the government’s economic policies are working.

With a Conservative as Chancellor, Liberal Democrat influence on the economic out-turn will mostly be through Danny Alexander’s work to control the details of public spending, and so keep deficit reduction on course, and on Vince Cable’s work to boost growth and investment.

However, this is an issue on which both Conservatives and Liberal Democrats will sink or swim together as the impact of the contributions from the different parts of the coalition will be so closely entwined.