The relentlessly breathless press coverage of the financial crisis over the past two years may have persuaded the electorate that we have already been through the worst of the recession. The truth is that such optimism is dangerously unwarranted. The economic reckoning for the general public has yet to begin.
The relative calm and stability in the bond and currency markets owes more to the imminence of a General Election and the markets’ confidence that an incoming administration will put politics to one side and administer the tough economic medicine the UK so desperately needs. For it is certainly not some miraculous solving of our dire public finances that has soothed the markets over the past few months. Indeed the IMF has calculated that over the course of the next decade, the UK government should ideally impose a fiscal tightening of 12.8% simply to restore the national debt to pre-crisis levels – an option considered by most to be so extreme that it would prove politically impossible to implement.
As we saw in last week’s Pre-Budget Report, it is only the Conservatives who have begun to wake up to the enormity and seriousness of the debt crisis that will underpin domestic politics for much of the decade to come. In essence this is why, with our party riding high in the opinion polls, the markets are calmly assessing the nation’s economic prospects.
The prospect of a hung parliament and further delay to the required radical decision making, pending a second election, risks tipping sterling and the gilts market into a catastrophic state. I repeat – the general public has spent the past two years believing they are living through a financial crisis without having to start paying the price. The effect of the current Government’s pumping money into the economy (however economically orthodox such a strategy may have been) has been to deceive the electorate into thinking this period has represented the worst of the economic downturn. It is one of the biggest indictments of this Government that it has continued to borrow recklessly whilst failing to educate the public as to the medium and long term consequences of such policies.
Understandably the public remains reluctant to have the comfort blanket pulled away. I totally support Conservatives unashamedly levelling now with the voters and making the case for an urgent restoration of stability to the public finances. For the colossal scale of this debt crisis brings with it the urgent need for fundamental rethinking as to the extent of the State’s empire. Unarguably this comes at some potential cost at the ballot box.
Nothing would be more damaging to our economic prospects than for a layer of political uncertainty to be added to our economic uncertainty. The markets have factored in firm action in the near future. Even as the sands of electoral time move inexorably towards next spring, the sterling and gilt markets risk being tipped over the edge if further delay results from an inconclusive election result. Just imagine the unseemly horsetrading that would result from a hung parliament simply to form a government.
In the absence of firm political decision-making about public spending and tax, market activity would certainly fill the void. The currency and bond markets would probably turn sour; there is a substantial risk of a sterling crisis; long term interest rates would soar and the nation’s essential triple-A gilts credit rating might even face a downgrading. If political leaders – concerned only in gaining tactical advantage – showed themselves unwilling to face up to the stark facts of this long march back to fiscal balance and economic recovery, it could even prove necessary to bring in the IMF. A political class unwilling or unable to take responsibility or court unpopularity may in this way be forced to bring in such a neutral umpire to administer the really tough decisions on public spending.
Nor should anyone rule out the prospect of inflation being allowed to run riot as the most politically palatable way to assist in running down the debt burden. Moreover, a dose of inflation provides the expedient route to enhancing the tax take as fiscal drag is allowed to run its course. The inflationary pressures brought about by the fiscal stimulus and quantitative easing may in any event make this path difficult to avoid in the years to come.
So how to bring about the decisive leadership on the economy that the country so desperately needs?
We have spent the past few months systematically discrediting the Government’s record for economic management. This has been an unqualified success. We have also been upfront about the collective task that lies ahead and we have made some difficult statements about the need to pare back public spending. But there remains a fundamental disconnect with the public – as well as a lingering sense of fear – that could well prove the difference between a working majority and a hung parliament. Rather than to continue to define ourselves in terms of negatives, I believe we now require a sweeping, positive, uplifting vision to counteract the dismal deficit of aspiration in today’s Britain.
From now on Conservatives need to promote a consistent and well articulated case for sustained economic growth. The truth is that rapid action to correct the deficit will be the quickest route to the promotion of growth and recovery. A rigorously thought-out timetable to sort out the public finances boosts confidence and – as all the international evidence shows – promotes more rapid recovery. Note too that nothing risks choking future growth more conclusively than tax rises. Cuts in public expenditure, rather than additional taxes, especially those on income, are more likely to result in economic expansion.
Above all, let us not forget that the opportunity this financial crisis lends us is incredibly exciting. Far more enthralling than the prospect of holding office during the placid past decade. Victory in the battle of 2010 has the potential to provide Conservatives with explicit consent to reshape the entire country, redefining the government’s role in the domestic economy and Britain’s role in the world. Let us now articulate that sense of excitement as to the challenges ahead. For sure, the public needs to know the scale of our problems and have a taste for the solutions. Once again it falls to us as Conservatives to give our fellow Britons something to believe in.