‘Look, things are better now — let us come in and spend the money, and then let the Conservatives come back and clean up the mess if you want. They won’t spend, because they’re rich — they don’t need state money, so let us spend it, we’re good at spending.’
That, to me, is fundamentally Labour’s pitch to the electorate.
Deficit talk doesn’t win elections. People relate to what’s in their pockets, not what’s in the nation’s pocket. And people want hope. Those two things win all democratic elections – money and hope. Simple.
The Conservative message, to be winning, has to be: by lowering taxes and by spending more on many services, we put more money in working and middle class pockets. We were able to do this thanks to a growing economy and because of extra taxes on the super-rich. For this reason, we are credible on our promises about the economy.
On that note, by the way — credibility — let’s talk about the deficit for a moment.
The financial crisis did not create the budget deficit. The trend was well in place before then, under Labour. But don’t get me wrong: financial crises, such as in 1990, do create deficits. It’s just that the one under the last Labour government was deeper than ever before, and we could see it happening long before the financial crisis actually hit. The financial crisis simply shrouded Labour’s mismanagement (ever rising deficits in a growing economy).
But surely, you might say, Labour, too, are able to create budget surpluses? And let’s not be too unfair: Labour can create budget surpluses (but what’s more likely is that they can benefit from a trend created by the previous government). See the data below. The big problem is that they lose control of spending – again the data below shows it. (Source ONS, image by Guardian).
Well before the 2007/8 global crash, the budget was running a huge deficit. Sure, the Conservatives, too, ran a deficit in the 1980s – but that was after inheriting an economy in shambles in 1979 (from Labour).
The data below shows it. My worry is that people will say, ‘let’s get Labour’s give-aways for 5 years, then have the Conservatives clean it up.’ Labour get to be ‘good cop’ and the Conservatives ‘bad cop’.
So why are deficits bad? How do they mean less money in working class and middle class pockets?
1) Government spending needs borrowing to fund it, and that means more spending on interest payments, and ultimately less money eventually for spending on things like roads, hospitals, and sharper cuts later. Sure, we won’t end up like Greece — but you get the idea.
2) public spending crowds out the private sector, which tends to be more efficient at running business. Every Government project is a project that the private sector won’t be in on. And that’s fine if you believe in nationalisation. But Britain doesn’t have a good experience with nationalisation. Civil servants should not run business — small businesses should, and they create jobs by doing it. This process of ‘crowding out’ leads to lower growth because the state does not turn out profits the way the private sector does – that’s why we, in Britain, believe in capitalism and not socialism.
And 3) big deficits means a weakening pound, so our imports become more expensive, and the cost of living increases – that hurts working classes in particular, because food and fuel prices rise.
Tax increases, then, become inevitable. The reason Labour traditionally is not trusted with the economy is because people did not trust that their taxes would stay low. The Conservatives became the trusted party of lower tax. Credibility. And the credibility issue is that, under Labour, deficits balloon, even without financial crisis.
Promises are one thing, but who do you trust? Who is credible? Who delivers on your hope for more money in your pocket?
Alpesh Patel is CEO of a UK Asset Management Company investing in Global businesses. He is a Board Member of the UK India Business Council and a former Financial Times columnist and Bloomberg TV presenter on global investing – as well as the author of 18 books on investing.