Conservatives back themselves into an economic cul-de-sac

For a decade and more, the Conservative Party has struggled to find popular support for its economic policies. Faced with the twin burdens of the early-1990s recession and public scepticism that their tax and spending plans were not savage cuts to public services in disguise, over the last three general elections the Conservatives failed to find a convincing voice.

Under David Cameron and George Osborne, the party took a different tack: sticking extremely closely to Labour’s economic policies and only offering a smidgen of a different approach. Monetary policy was to stay in the independent hands of the Bank of England, spending levels on core public services were to stay the same as under Labour (trying a repeat of the Blair/Brown tactic in the run-up to 1997, where they pledged to stick to the then Conservative government’s spending plans) and tax cuts were to be talked about as little as possible. The one smidgen of difference was to be “sharing the proceeds of growth”; i.e. some of the extra tax revenue generated by economic growth would go in tax cuts and some in extra spending.

But this was always a policy for the good times. Without growth, there are no proceeds to share around, leaving the Conservatives in a double-bind.

First, they now try to argue that Brown failed to fix the roof when the sun was shining, i.e. wasted money rather than cutting debt. That is a bit of a problem, because at the time the Conservatives weren’t saying share the proceeds of growth between public services and cutting debt; the wanted the money to go on tax cuts instead.

Second, even if you glide over this u-turn which amounts to saying “Yes, we got our economic policy wrong too”, what to do next? George Osborne has made several attempts to launch a new economic direction for his party, most recently a speech last week to the London School of Economics (LSE). But he continues to get, at best, lukewarm reviews.

(Curiously, as an aside that is revealing about the state of British politics online, consistently the most persuasively expressed online arguments that Osborne’s economic policy is a muddle come from the right, particularly the Spectator’s Coffee House blog, rather than from the left.)

His problem is that he is arguing that government debt is too high, he wants taxes to be lower, but he’s not wanting to return to the pre-Cameron days of talking about spending cuts either. Even with economic growth providing extra revenues to play with this would be an extremely ambitious and implausible trio: borrow less, cut taxes but don’t spend less. Without growth, it’s a policy that just doesn’t add up.

But it gets worse. The Conservative approach to restoring growth to the economy is to rely on monetary policy (principally interest rates) rather than fiscal policy (tax cuts and spending). With interest rates set by the Bank of England, it means the Conservative plan for economic growth is limited to doing whatever it takes for the Bank to cut interest rates under its current rules (unlike the Liberal Democrat approach, which includes a call for a change in the Bank’s remit).

It’s also hardly an effective public rallying cry, “Vote for us and we’ll do nothing that makes it harder for someone else to do something.” An unfair caricature you think? But these are Osborne’s own words (in the Daily Telegraph, 29 October): “The Government should do nothing that makes it more difficult for the Bank of England to cut interest rates”.

Lower taxes, higher spending or higher borrowing all would make it harder for the Bank. So it looks to boil down to a policy of saying higher taxes, lower spending and lower borrowing. Perhaps it is no surprise the details of the policy are so elusive!

And it’s no wonder Vince Cable has described George Osborne as “way out of his depth”, saying, “his arguments on how to get us out of recession are entirely incoherent”.