Wednesday, November 26, 2008 

Advertising bombshells.


The problem with combining political strategy with advertising campaigns is that when the facts change you can be quickly left looking daft.

This is exactly the trap that the Conservatives have fallen into. Last week, when all we had was rumours and guesswork over what was going to be in the pre-budget report, but where the inkling was that the government was going to produce a stimulus package worth somewhere in the region of between £15bn and £30bn, the Tories thought they were being incredibly clever by bringing back their 1992 tax bombshell campaign. Cheap, effective and simple, and they tried something similar back in 2003. It's partly down to this campaign that Alistair Darling had to set out in such detail how he was going to pay for it, which he did to a fairly decent extent. As it turned out, this wasn't really a bombshell budget in tax terms; yes, the borrowing figures are frightening, but this was negated by the taxing of the rich, which was the distraction measure and sop to the left rather than the main revenue raiser. The real surprise was that national insurance would go up by 0.5%, the part that could be accurately described at least as a potentially painful tax rise.

Almost all of the Conservative fire was concentrated on the national debt. The drop in VAT was the distraction, until an apparently wrongly issued, uncorrected paper on the changes to the tax system still read that VAT was to rise by 1% after 2011, to 18.5%. It was a pretty obvious mistake, as the government quickly made clear, also admitting that they had discussed raising VAT but had decided in the event to raise national insurance instead. You can't however blame the Conservatives for seizing on it, and trying to make hay with the idea that this was a secret plan to raise VAT, with the government not being straight about it. Fair enough.

What you cannot then realistically say is that a 1% rise in VAT is going to be a bombshell, especially when you have been sniffy about a 2.5% drop in the first place. True enough, VAT is a regressive tax, which hits the low paid who don't save but instead spend far harder than it does anyone else. Raising it by 1% would hurt them; Daniel Davies estimates that the cut gives someone working 40 hours a week on the minimum wage £2 a week back, so it isn't outlandish to suggest that a 1% raise would cost them between £40 and £60, possibly more, a year. Not a major sum, but for someone struggling it can more than make a difference. It is not though by any stretch of the imagination a tax rise which is going to put someone into instant penury, especially the mythologised "hard-working families" which both parties so bend over to talk about and discuss. It's equally risible that the country is going bankrupt, as Cameron also claimed at prime minister's questions.

The problem for the Conservatives is getting the balance right between such potentially damaging statements as the country is going bankrupt, which scares people, and attacking the government's lackadaisical and potentially even more damaging plans. Likewise, their own proposals are both rightly and wrongly being lost in the mire, more rightly judging by Cameron's piss-poor examples of what they would do differently, their promised freezing of council tax being revenue neutral and the other two suggestions ones that the government is already doing. Technically, all they have to do is sit and wait and see if the cut in VAT has an effect: if it doesn't, they can claim that their stance was the right one all along. If not, they might be in further trouble. Even then, there's no accounting for whether the public then decide that the softening of a recession created more than in part by Brown means that they'll vote Labour. The Conservatives might still be floundering somewhat, but the end result is still far from certain.

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11/26/2008 11:54:00 PM | | | links to this post

Monday, November 24, 2008 

The pre-budget report.

The media can often be accused of overstating otherwise run of the mill events, both for effect and to try to put conflict into politics which has for some time not been there, but today at least it has both been right to describe the pre-budget report as a gamble and to point to it as at least the end of a 14-year long, if not 30-year long economic orthodoxy.

Let's not get too carried away with ourselves though. This isn't, as Pollyanna herself is promoting it, the end of New Labour and the beginning of social democracy, only a year after she declared that social democracy was dead, but rather a readjustment forced on New Labour by events of their own making. Keynes may have been taken out of the box, dusted down and decorated like a soon to be hauled out of the loft artificial Christmas tree, with Friedman, monetarism and supply-side economics placed on the naughty step, but this was still a cautious, as it had to be, reappraisal of what New Labour's economic policy would become when faced with recession. If anything it was far too cautious when it came to deciding that some of the stimulus package would be paid for by increasing the top rate of tax on those earning over £150,000 a year to 45% - raising a little over £2bn, a pitiful amount. They could have surely got away with making it 50p in the £1, and dropping it to those earning over £125,000, even £100,000, as the old Liberal Democrat policy was, raising a much more substantial amount.

Even if it it is timid, it's still the breaking of the Labour promise at the last three general elections not to increase income tax; the last major shift was 20 years ago when the rate was dropped to 40% by Nigel Lawson, causing uproar on the Labour benches. It is long overdue, an overt return to redistribution, previously carried out almost by stealth on tax credits, where the scheme is so complex that the costs of running it and frustration of those on it who often end up having to pay back that which they weren't supposed to take almost do more harm than good. It also leaves the Tories in a quandary: do they attack it as a tax on wealth creation, on hard work, or agree with the progressive thinking behind it in their new, caring, tough on bonus culture way? At the moment they seem to be uncertain.

As welcome as the shift to taxing the rich more was, the rest of the PBR was almost teeth-grindingly awful, not in the policy sense, but in the doom that pervaded it and which we have to look forward to. Darling, for his part, who I'm willing to suggest is a far more accomplished politician than he has ever been given credit for, did his best to offset this both in his familiar dull delivery, without bombast, and only a few party political jibes at the party opposite, the old style bank manager within him shining through, and in the very optimistic estimates for how quickly we will pull ourselves out of the mire. The Treasury forecast is that we will only be in negative growth for four quarters, the second of which we are currently in. Next year will see a fall in output of between 0.75% and 1.25%, which again seems highly optimistic, both by other forecasts and by the fact that the economy shrank last quarter alone by 0.5%. Equally hopeful is that savings can be found, yet again, within Whitehall which will help to lower overall borrowing, which Darling expects to reach 57% of GDP by 2013-14 - or about £500bn, which really will put us amongst the most indebted of the G7, if not the world.

All of which makes it all the more dark-eyebrow raising to see that £12.7bn of the £20bn stimulus package is to come by cutting VAT by 2.5%. Making it even less attractive is that the duty on tobacco, alcohol and petrol will rise to ensure that there is no overall difference, thus leaving the only things on which the cut will make any real difference expensive electronic goods, cars and furniture. You get the impression that they must somehow know something which we don't, as surely a far better way to have inspired spending would have been the American way of cutting income tax, directly sending cheques back out with the rebate instantly cashable. Unity argues that it will result ultimately in lower consumer prices even on zero-rated goods, which is what the government must also be hoping for. It will become quickly apparent if it has worked or not: if this Christmas is as bad as the retailers have been suggesting it might be, and their sales in January also fail to spark interest, the indication will be that it will have already failed.

The unsurprisingly unleaked other major change was that alongside the tax rises for the rich, national insurance will rise by 0.5% from 2011, which will directly hit the middle classes, and even the upper-working class, affecting those earning over £20,000 a year. With the average wage being somewhere around £24,000 a year, although if we face a far harsher recession than that forecast by the Treasury with deflation a major issue that could in fact drop, it's bound to further embitter those already fed up with Labour and who haven't benefited from the 10 years of relatively benign conditions. At least however they know what's coming: the government's spelling out of exactly what will have to rise to pay for the stimulus, as they had to do and also did to pre-empt the Tory shouts of a coming "tax bombshell" was for the most part well-handled.

George Osborne, for his part, was mostly dreadful in response. The only real hit he landed was that the gap between the stimulus ending and the tax rises kicking in signified that what they were really concerned with was the political cycle rather than the economic one, and it does indeed now look as though Brown will wait until the last moment to call the election, although any party in the same position would have almost certainly done the same thing. This was again though the blundering Conservative party which we have become accustomed to on economics over the past couple of years, decrying Labour while offering no substantive alternative, or indication of what they would do instead. Osborne gave no specifics whatsoever, surely a mistake, even if his anger may have struck a chord.

For all the talk of shifting back towards the comfortable ground on which both parties once stood, at best what they have done is take a few steps to the left in Labour's case and a few steps to the right in the Tories'. Unfamiliar to begin with, but easy to adapt back into. A far bigger change is that all three parties will go into the next election having to promise not tax cuts, or as it has been over the past three elections, the investment versus the status quo dichotomy, but instead tax rises. We will back to the biggest question being who you trust the most to run the economy. After 10 years of New Labour economics, if there is such a thing, the answer ought to be obvious. Yet whilst the Tories both fail to look convincing or offer anything even approaching an all encompassing policy, you'd still have to more than consider the odds on the devil we know. How deep the recession will turn out may will be the ultimate decider. Politics may not have just become interesting again, as per the cliché, but it certainly has, after years of economic consensus, suddenly got far more intriguing.

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11/24/2008 09:32:00 PM | | | links to this post

Thursday, November 20, 2008 

Those Conservative economic travails.

This must be a truly strange time to be a supporter of the Conservative party. To enter cliché for a moment, all the chickens have finally came home to roost. The man who promised an end to Tory boom and bust has succeeded in abolishing boom, while the prospects for the bust look increasingly ominous. The economy which he boasted was among the best placed to deal with the global downturn is in actual fact one of the worst placed to deal with it, according to the IMF and the European Union. Unrelenting, the Labour party believes that the solution is to borrow more to fund the tax cuts to stimulate the economy. As Larry Elliot has pointed out, this is a direct contradiction of what Gordon Brown formerly believed. At the weekend the same man attended a conference which he claimed would back up his solution to the downturn; it did nothing of the sort, and predictably only agreed to more or less meet again. Gordon Brown, by rights, ought to be finished.

Instead, it's the Tories themselves that look as though they're the ones in need of some sort of a stimulus. By contrast to Brown, who seems unaccountably at the moment to be walking on water when he should be sinking like a brick to the bottom, they're the ones looking washed up. Nothing they do at the moment can get a look in, or when it does it's almost immediately knocked down for its flaws. Take their hastily cobbled together policy on tax breaks for employers, which was dismissed almost universally as being the kind of tax con which the Conservatives have so often accused Labour of pulling. This week's panic was, with it looking almost certain that there will be at least £15bn worth of tax cuts in Monday's pre-budget report, the minimum needed for it to be minimally beneficial, to declare that they would, despite everything which they've previously said, not stick to Labour's spending plans for at least the first year should they win the next election. In any event this was always a false promise, but such was the apparent anxiety within the party over the floundering response to Gordon Brown's sudden found decisiveness that red meat had to be tossed to those who have always wanted tax cuts before anything else.

Even this though leaves the party looking contradictory, or at least at first glance it does. On the surface it looks like a standard, fiscally conservative measure: you can't borrow your way out of a crisis, so don't try. Instead, spending cuts will have to be found. Yet the Tories are still committed to spending the same as Labour on the NHS, the police and on education, whilst refusing to say where the cuts would be made. Even abandoning ID cards, as they promise, will not immediately summon up the £20bn that they are forecast to cost once they are fully introduced. The figures simply don't add up. As a consequence, the Conservatives are again being accused of being the do nothing party, and it's an insult that for the moment appears to be sticking.

Some of this is undoubtedly thoroughly unfair on the Conservatives. An element of their plight at least is that the media has become bored of the prospect of the Conservatives sleepwalking towards victory at the next election, and with Brown's sudden self-proclaimed saving of the global economy, they have a new horse to get behind, even if it's the same one they were previously saying was only fit for the glue factory. Also influencing it though is that despite all the plaudits mystifyingly bestowed upon George Osborne, such as politician of the year, they have been absolutely hopeless on the economy ever since the run on Northern Rock. Their immediate tactic was to portray the potential nationalisation as a return to old Labour, which could have worked if they had a realistic alternative policy. Gordon Brown took fright, which is partly why they dithered and dithered and made things worse by not doing it sooner. The problem was that the Tories didn't have an alternative, and that everyone got so fed up with waiting for them to come up with one that Vince the Cable suddenly emerged as the politician who knew what he was talking about, given pride of place as the first man to turn to for analysis which ought to have been coming from the real opposition.

The other reason though is that they like Brown and New Labour truly believed the rhetoric. They honestly thought that the economy was now an area of consensus, that growth was natural and endless, and that it was social policy on which they should concentrate. A nasty and pernicious social policy it is, calling a society broken when is isn't and which their solutions for fixing are the opposite of what is needed, but a policy it was, and one which the conservative press especially were fully behind. They may have made some murmurings on personal debt, but they offered no substantive opposition to the government on its spending and borrowing plans, and as Labour has rightly pointed to, they even proposed loosening the regulation on mortgages. Their belief, like Labour's, was that we didn't need to worry about not actually making anything, it was making London the city in which to do financial business which mattered most. In fairness, many of us became caught up in this fantasy: that neoliberalism, despite all the evidence to the contrary, could deliver, and that through almost indiscernible redistribution, played down at every opportunity, that the proles would not become too upset at being continuously shafted. The latter it seems can still be contained, for now, but it was neoliberalism itself which has come in for the mightiest of shocks.

From being 28 points ahead at one point in the craziest poll, the Conservatives are now down to just 3 points in front, within the margin of error, in the mirror craziest poll. Unlike New Labour prior to 97, whenever things aren't going their way, the Conservative approach seems to be to panic. Last year, during Brown's brief honeymoon, there were murmurings of defenestrating David Cameron, such was the concern that the change in leader would affect their fortunes. Luckily, Brown succeeding at shooting himself in the foot not just once but on numerous occasions, first through a dismal conference speech, then over the election which never was, then the obsession with 42 days, then the 10p tax rate etc etc, coupled with Osborne's moment of supposed genius, the raising of the inheritance tax level to £1m. This time round Osborne himself is the casualty, not helped by his dalliances with yachts and trying to win in an unpleasantness contest with Peter Mandelson.

The really strange thing is that the Conservatives have arrived at the right policy in the circumstances in a completely Byzantine way. Although their claims that we are among the most heavily indebted nations in terms of GDP is bogus, even if you include the nationalisations, PFI and pensions, they are right that we should not be further adding to those figures without explaining fully and comprehensively that this means taxes are going to have to rise significantly, or that spending is going to have to be cut considerably to return at some point to equilibrium. After a crisis that was caused by private-sector debt, the public-sector should not be seeking to emulate it. If we are going to have tax cuts, then we should be funding them appropriately by either cutting the ludicrous number of databases we are planning or which are in use, abandoning ID cards, getting rid of Trident and not replacing it, not "investing" in aircraft carriers, by getting out of Afghanistan and Iraq now and by raising the top rate of tax on the richest considerably. It was our indulgence of them that led to this mess, and while our politicians should more than shame the blame, they should also help to pay for it, by also closing down the loopholes that allow so many to evade tax altogether. The party that again seems to be leading the way is the Liberal Democrats, who are flat-lining in the polls and have more problems it seems than the Conservatives. That, sadly, is modern justice.

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11/20/2008 11:41:00 PM | | | links to this post

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