*** Economy update – March 2014 ***
The tide has somewhat turned in the Conservatives favour. Less than 18 months until the General election and the economy seems to be resuscitating. Better late than never I suppose. With Mr Osborne revealing his last budget for this Parliament next week, the Tory party are trying to map out their economic stance. It is clear that the 2015 general election will be laden with tax and spend policies, as the main parties not only try to prove that they are economically credible but that their policies seek to benefit the hard working.
The first three years of the coalition were characterised by flat lining growth, missed targets, a loss of Britain’s AAA debt rating and a triple-dip recession scare. However, the latter part of 2013 saw improvements in almost all macroeconomic sections. Economic growth for 2013 measured up at 1.8% compared to the sluggish 0.3% of 2012. Osborne insists that his “long term economic plan is working”, with economic growth complemented by increased investment and fast pace job creation in the service sector. Despite Osborne’s “long term” economic plan, Labour still maintain that the government is not meeting its longer term goals as the majority are yet to feel the benefits of this recovery as their wages are eroded by inflation and battle with the so called “cost of living” crisis. Not to mention, the economy is still smaller than it was pre-crisis and this recovery has taken far too long. Economists have started to water down expected forecasts for the economy as low productivity levels stifle economic growth.
Unemployment figures have also fallen to 7.2%. As we approach the 7% figure earlier than expected, the Bank of England has revised its earlier decision to raise interest rates when unemployment falls below 7%. Significantly, youth and long term unemployment have also fallen, an issue that poses the most threat to the economy. Rachel Reeves, Shadow Work and Pensions Secretary, believes unemployment levels are still too high and that there is still more work to be done. The fall, although welcomed by the Labour Party had the caveat “the government must not be complacent”. Miliband insists wages are £1,600 less than what they were in 2010, and that 13 million people are living in poverty. As unemployment continues to decrease, so does the spare capacity within the economy – what this means is that the economy needs to grow by a faster rate in order to deter inflationary pressures. Inflation is now close to the Bank of England’s inflation target (2%) as it dropped to 1.9% in December to January. Although wages have only risen by 1.3%, some expect wages to rise at a similar rate of inflation, and with plans to raise the minimum wage to £6.50 in October this seems likely to happen before May 2015.
Both Labour and Conservatives have committed themselves to running a budget surplus in the next Parliament but this is very difficult to visualise since the deficit still remains at £111bn. The Lib Dems have accepted the Conservatives’ plans to eliminate the deficit but say that they would go about it in a much ‘fairer’ way; through a mixture of higher taxes and cuts in government expenditure. Just a few months ago, the Lib Dems proposed to raise the personal tax allowance to £10,500. What this would mean is that the first £10,500 earned would be tax exempt. The Tories have now claimed this policy as their own. Cameron says that he will prioritise tax cuts for the low paid in an attempt to shake off the perception they are out of touch, protecting the rich.
It is still premature to conclude that this upturn is down to fiscal conservatism and austerity, but confidence in the economy is key, and with people spending more and businesses increasing investment it is likely that the economy will continue to strengthen in the lead up to the election. All the parties know what the next election will be fought on, as Bill Clinton once said, ‘it’s the economy stupid’.