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john birchall

Will the economy influence the result of next elec

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The next election in UK could be as little as one year away. With Blair unpopular and Howard beginning to make the Tories look a creditable opposition the fight for power could be an interesting.

Normally, a sturdy economy means election success for those in office but in 1964 and 1997 the government lost even though the economy was growing. So, what might determine the result in 2005 or 2006?

My ideas are as follows:

Letter from an Economist – 9th February 2004.

In a week such as that which has just passed one is tempted to look more closely at trust and how it has been significantly reduced in what is loosely called ‘public life’ during recent years. But I will resist such a temptation and stay within my brief, which is a look at certain economic events and pass my opinion on their derivation, impact etc. However, before proceeding I would like to note my sadness at the passing of one who greatly influenced me when I was first showing an interest in economics and political affairs. Norman Shrapnel was for many years the leading political writer of the Manchester Guardian. His grasp of the events that surrounded those walking the corridors of power and his eloquence have seldom been surpassed. Not only did he write accurate and witty descriptions of the events of Westminster but he often doubled as theatre correspondent, where he gained a reputation as one that could cruelly deflate the egos of those attempting to produce a less than perfect rendition of a particular play. In later life he turned to writing books, of which his critique of the 1970’s is perhaps the most interesting to read.

But back to matters contemporary. For the first time in my life and therefore in the majority of readers a Labour Government is presiding over a tranquil economy. A look at any of our daily papers shows us fascinated by Hutton, romps in the jungle and the next purchase of Chelsea FC. Very few column inches or TV ‘idiot board’ scripts are given over to the economy and how we feel about ‘the pound in our pockets’.

It has long been thought wise to keep the economy out of the public debate, so allowing the ‘man in the street’ to assume the government of the day is competent and then who ever is in power will continue to muster enough public support to win the next election. A look at UK Plc shows low interest rates, relatively even levels of employment (with the exception of the cluster areas we all know will never see maximum employment in the foreseeable future) Yet those who research such things do point to a healthy economy not always winning the incumbent party the next election. In 1964 Hulme lost to Wilson and Blair arrived in Downing Street despite all Ken Clarke’s careful management of the economy. However, a closer look at these seminal elections shows that other issues were central to voting patterns. In 1964 Harold Wilson looked out at a discredited Tory party. They had served for thirteen years and presided over the birth of the consumer age. Yet, their occasional moral misdemeanour left the public tired with the antics of those many considered to be ‘born to lead’ and with The Beatles, Carnaby Street and all the trimmings of the permissive age very much to the forefront Wilson entered Downing Street. In 1997 John Major sat at the centre of power and was considered by many to be a decent man (Edwina Currie was still deliberating whether to tell all about their affair) who had been unfortunate in his choice of political allies. The cloud of Black Wednesday and the intent dislike of all things ‘European’ within a section of his party had left him mortally wounded and the British electorate plus our ‘first past the post’ system of voting dealt him a cruel end.

So, as an economist I sit and look at a plethora of reasonable numbers and wonder if Tony Blair will become the first Labour Prime Minister to preside over three consecutive parliaments. Before looking at the troubles currently taxing the minds of the residents of 10 Downing Street we need to look back at the two eras I briefly described above. In the 60’s many did see us as falling behind Europe and that our leadership was out of touch with the reality of everyday life in this country. In the late 90’s the backlash of those tired by stories of sleaze and corruption meant that whatever numbers came from The Treasury the opinion polls looked bad for the Conservatives. It is interesting to note that the election results of both 1997 and 2001 bore a very close resemblance to the opinion polls published eighteen months before polling day. If we were to repeat such a trend then Mr Blair is in trouble and it is rumoured that some of his advisers are suggesting that he sit tight until the very end of his legal term in office. A 2005 election now looks increasingly unlikely. Why then can a government who appears to have managed the economy with considerable care be in such difficulties with the very people who have benefited from such a well-balanced stewardship?

Our first port of call is the economy, which as ever is very much dependent on the US for its success or failure. As recent ‘Letters’ have suggested all is not totally well with things in the US and the continued uncertainty about the accuracy of facts that lay behind the decision to go to war may yet cause ripples in Wall Street and elsewhere. Further a field the miracle that is China might just slowdown a little but all forecasts suggest continued world growth until early 2006 and maybe even beyond. However, now personal vanity and insecurity has to enter our equation. What would happen if Tony Blair, known to be one who likes to be liked felt that Gordon Brown was getting too much credit for clawing back a lead the Tories may now have in the polls? But Blair is a realist and he knows that he is wounded but not defeated. If he took out his spite on Brown it would serve little purpose.

So, what are the prospects for a third Blair term? Once again I feel that economics may yet be the decided and not WMD’s or a sudden burst of rational thinking from Michael Howard. UK Plc has always shown two fundamental weaknesses, these are low productivity and an inclination to use debt to finance consumption – and not just of consumer durables. The latter is a growing concern as debt is becoming just a way of life and too many people now expect high levels of consumption and find any thoughts of being frugal alien to their way of life. It seems very unlikely that efficiency will feature high on the list of voter preferences in the election of either 2005 or 6. However, with short term interest rates continuing to rise it will be interesting to see how large-scale debt and falling house prices impact on the very people Blair needs to keep his large majority.

Michael Howard has already asked the Prime Minister to resign, though his choice of an allotment from which to make such a request might have been unwise. In reality he needs gross misfortune, blatant stupidity (and the failure to listen to the clinical analysis of Robin Cook might yet enter this category) and some old promises not materialising in order that they can really hope to dent the Labour control of the House of Commons. The arrival of a global slide in economic confidence seems to be a very optimistic wish and the meeting of the most powerful Ministers of Finance in the world ended with a statement that they see the very opposite taking place.

No, unless the public does decide that a conversation involving battle field weapons heard by two in the room must also have been registered by the Prime Minister it looks as though 2005 or 2006 will not be a repeat of 1964 or 1997. Yet, as we know as economists a sudden drop in house based wealth and an increase in unemployment might just be enough to blow the result off course.

It seems that Mr Blair, or his successor is set for a third term and Mr Howard will have to keep the Tory bedrock vote without resorting to some of William Haigh’s extreme threats of an economic armageddon. Then of course, there are the European Elections later in the year and local government..............

Edited by John Simkin

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John Birchall is right to suggest that the state of the economy is usually the main factor in deciding general elections. It is also true that governments tend to lose elections than opposition parties actually win them.

However, as John points out, there have been several notable occasions when a government has been defeated despite the good state of the economy. In the two cases he mentions it followed a long period of Tory rule. An important factor in this was the public felt the government had developed a sense of arrogance. That it was the party of government. I suspect that at times like this people feel that our democracy is under threat and that it is necessary to oust the government.

I believe that a lot of people are feeling the same way about Tony Blair’s government. This is reflected in the polls (one last week showed the majority of people in Britain think Blair should resign as prime minister).

Blair will be hoping that the public will eventually forget the Iraq War and concentrate on the economy. With rising house prices, low interest rates, and low unemployment, most people seem fairly happy with the economic situation. However, there is a large group that are not so happy. I am talking about those people who already own their own house, are retired and are living on pensions or/and their investments. For this fast growing group, things are not so good.

Brown has been good at controlling the economy to please his target audience. How long will he be able to do this for? Houses are clearly over-priced. Young people on reasonable incomes are finding it impossible to enter the market. History tells us that it is only a matter of time before the price of houses reflects the incomes of house buyers. In other words, we are either going to have wage inflation or a reduction in the price of houses. Of these two options, I think it is likely to be a fall in house prices. In order for realignment to take place, this will mean quite a dramatic fall. The government will be blamed for this and those with negative equity are unlikely to vote New Labour.

Even if we do have a fall in house prices or an increase in unemployment rates, I doubt very much whether the British people will elect a Conservative government. A large number of people are aware that Conservative spending plans do not make sense. The British public might find Conservative policies on pensions and higher education appealing but they are unconvinced that they can be paid for without substantial increases in taxation.

My guess is that New Labour will win with a dramatically reduced majority. In fact, I believe that they will be forced to form a coalition government. I hope that the Liberal Democrats will demand as the Labour Party demanded in 1940: the resignation of the prime minister.

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