On the economy, are Cameron's Conservatives just 'New New Labour'?

The Conservatives have lived under the shadow of Black Wednesday in 1992 and the loss of their reputation for economic competence for sixteen years. The financial crisis has given them the opportunity to regain the initiative, but they took some time to realise the extent and depth of the crisis, and to formulate their response to it.

This was partly because Conservatives had always been associated with the City of London, and had been staunch defenders of light touch regulation. They were proud of the fact that the great achievements of the financial sector in the previous twenty five years derived from the Conservative decision to force reform on the City in the Big Bang of 1986. They had assisted the development of the financial growth model which treated individuals as financial subjects, expanding the range of financial products and forms of credit which they could access. The growth of consumer credit and debt, and the generation of asset bubbles, were at the heart of this economic model.

During the first ten years of new Labour, the Conservatives were forced to watch as Labour took credit for the success of the City, and maintained light touch regulation. The only thing the Conservatives could find to object to was that the government did not relax regulation further to make the City still more attractive to foreign investors and foreign banks. The Conservatives scoffed at Gordon Brown’s boast to have abolished boom and bust, but for ten years the boast held, and every time the Conservatives predicted difficulties for the economy, they did not materialise. The British economy grew uninterruptedly between 1993 and 2008. There were many fears expressed that the boom was not sustainable, but these were brushed aside. The Conservatives still doubted Labour’s ability to manage the economy and expected old habits to reassert themselves, but they did not doubt the basic engine of economic growth on which Labour relied, because it was they who had installed it.

Before the crash in 2008 the Conservatives expected to inherit a basically sound economy from Labour and run it in a more efficient manner. David Cameron and George Osborne spoke of the growth dividend, which the Tories would allocate in a different manner to Labour, still giving some of it to increase public spending, but allowing the rest to boost incomes. This assumed that economic growth would continue, and that economic conditions would be relatively benign, with inflation and unemployment both low. The Conservatives were concerned, however, about public finances and the gradually increasing levels of debt which Gordon Brown was using to finance the rapidly rising levels of public spending, particularly in education and health.

The crisis began in the summer of 2007 with the first signs of problems in the sub-prime mortgage markets in the United States. The first major British casualty was Northern Rock in September 2007. The Conservatives were instinctively against government intervention, and favoured private sector solutions. They did not support bailing out banks and bankers. As the crisis deepened through 2008 the Conservatives began to criticise Gordon Brown’s stewardship of the Treasury, arguing that he had failed to fix the roof when the sun was shining. Instead of building up reserves during the years of economic growth, Brown had increased levels of public debt in order to expand public spending more rapidly. If the economy had continued to grow this would have been no problem because British debt levels were still quite low compared to many other advanced economies. The problem was that if growth stopped, these debts would be hard to service without cuts in public spending or increases in taxes.

This was a promising line of attack against Labour during 2008. It was assumed that the housing bubble had got out of hand and that there needed to be a correction, and that because of the way the UK’s finances had been managed this would not be easy to achieve. The Conservatives sensed an opportunity to embarrass the government and to throw doubt on its record of economic competence. What few people expected were the dramatic events of September and October 2008, when for a short while the whole banking structure wobbled, and not just small peripheral banks, but the major banks themselves were in risk of default, with incalculable consequences for the economy.

The Conservative response to these events was at first uncertain, while the Labour government acted with some resolve and determination to shore up the banks with massive bailouts and taking direct government stakes in them. As believers in light touch regulation, arms-length government and the sovereignty of markets, the collapse of so many of the biggest financial players was a deep shock to the Conservatives. Their inclination was to resist government takeovers of the banks and also to resist large financial bailouts and fiscal stimulus packages, because of the effect these would have on the public finances. Their position was derided by Labour ministers as a ‘do nothing policy’, which if implemented could lead to the meltdown of the financial system and a wider economic collapse. The government portrayed itself as spending and borrowing in order to mitigate the recession that had now become inevitable and allow recovery to begin as quickly as possible.

The Conservative position mirrored that of many Republicans in Congress, who opposed the bailouts and the stimulus packages announced by the Bush administration and amplified by the Obama administration. Both Britain and the United States adopted quite similar policies to deal with the financial crash and the looming recession, which reflected the precariousness of the financial system in both countries, following twenty-five years of growing public and private debt. In Britain the Labour government recovered some ground and regained some of its reputation for economic competence. This phase, however, did not last long. Although decisive action prevented a complete financial meltdown in the autumn of 2008, the consequences of the bailout were severe in terms of the increase in public debt, and the effects of the recession became increasingly apparent, with numerous bankruptcies and sharply rising unemployment.

The Conservatives also began to deploy a new argument which has had increasing impact. The budget in April 2009 was seized on as vindicating their new stance. While the government constantly argued that the crisis was a global crisis which affected all countries, and that Britain had been temporarily blown off course by a monstrous financial tsunami, the Conservatives argued that the crisis was primarily a national crisis rather than a global crisis and reflected ‘ten years of debt’, and an irresponsible fiscal and monetary policy which had ended in disaster. In this way the Conservatives have been able to resurrect one of their core arguments from the past, that Labour Governments always produce financial disasters – 1931, 1949, 1967, 1976, and now 2009. The Labour Government elected in 1997 appeared to have broken with this pattern, and indeed presided over a longer period of uninterrupted economic growth than any government in the twentieth century. Labour had become firmly established as the party of economic competence, something it had never enjoyed before. With the budget of 2009 the Conservatives saw their chance to rubbish the record of the previous ten years, and to infer that the debt crisis and the austerity to come was due to Labour’s economic mismanagement.

The Conservatives have found a coherent line of attack on the government, but their economic policy is still not entirely convincing. They are reluctant still to admit the depth of the crisis. They do acknowledge that there will need to be very severe spending cuts and tax increases, but they are extremely wary of spelling out where these will fall, because, for electoral reasons, they do not want to move too far from what Labour is planning to spend. Labour’s symbolic raising of the top rate of income tax, first to 45 per cent, then to 50 per cent for earnings over £150,000 has also been accepted by the Conservatives. They have made it clear that reversing it will not be a priority for a Conservative government. Some Conservatives are urging that this is the moment to break with Blairism and the new centre ground which Blair established, and for the Conservatives to propose radical tax cuts, and a huge shrinking of the state. The difficulty with doing this is that in a recession people crave security and protection, which only the state can provide, and the adoption of radical policies could have explosive consequences. Cameron wants to govern as consensually as he can, and that means, in practice, sticking quite close to Labour plans and Labour solutions, while lambasting Labour as the architect of the mess.

The difficulty that Cameron and all the main parties face is that this recession and its consequences are not going to be shortlived, and the old model cannot be revived. The years of plenty are about to be followed by the years of famine, and they could last almost as long. This is going to pose quite new problems for democratic government, and not only in Britain.