Obsolete

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.

Labels: Alistair Darling, Conservatives, David Cameron, economics, Gordon Brown, politics, pre-budget report, recession, tax cuts, tax increases

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11/26/2008 11:54:00 PM | Permalink | | 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.

Labels: Alistair Darling, Conservatives, economics, George Osborne, politics, pre-budget report, recession, tax cuts, tax increases