For many of us, being a Labour party member is synonymous with knocking on doors. Typical issues raised include antisocial behaviour, the state of the roads, maybe something to do with their doctor’s surgery or local hospital, for a while Iraq/Tony Blair. For a decade the economy has not been an issue on the doorstep. That is changing.
Three examples from May’s elections. First, a homeowner for five years, benefiting from low interest rates and strong house price growth, but worried now about the value of his home and getting a good mortgage deal when his current rate finishes. Second, a pensioner on pension credit, with free bus travel, fuel allowance etc. She is worried about the change in the 10p tax rate and increases in utility bills and council tax. Third, a young graduate with a good job in a media firm in Leeds, but concerned about getting on the housing ladder and worried about debt from university and on credit cards.
For the first time since we have been in power, people are scared about their finances. But perceptions can run ahead of reality. Although financial firms are struggling there are many reasons to be optimistic: the FTSE is up compared with the start of the Northern Rock crisis; many firms, especially technology companies, much of manufacturing and the utilities are doing well; and employment is at a record high.
So, what can the government do to offer reassurance and to show that Labour is on their side?
On traditional measures, the government’s hands are tied more than we would perhaps like. With the Bank of England forecasting inflation of 3 per cent by the end of this year, the potential to cut interest rates is limited. The raising of the personal allowance will inject £2.7bn in to the economy, but with the debt to GDP ratio forecast to rise to 39.8 per cent (just shy of the 40 per cent government-imposed limit), the scope for more tax cuts or increases in spending are constrained. The sterling exchange rate has already fallen markedly – especially against the Euro, boosting exports.
Other positive actions have been taken – not least the non-taxable personal allowance which will help those who need the most support in the weaker economic environment. The extra help for first-time buyers, through shared equity schemes, and the £200m fund, to purchase unsold new homes and then rent them to social tenants is great news (subject to the homes being appropriate for families, where the most need is). All these are sensible and progressive ways to support the economy and hard-working families.
On top of this, the government must keep up pressure on the banks to treat customers in financial difficulty with due care. And retail and investment banks need to be more transparent about their exposure to the sub-prime problems, and also about their potential exposure to a deterioration in the UK housing market – we’ve Northern Rock’s customers in mortgage arrears double – what does this look like for the other banks and do they have the capacity to absorb more losses? More shocks in the financial sector will only further undermine already frayed public confidence, so let’s try and increase transparency and understanding of the risks. The Bank of England also needs to maintain an open door policy with the financial sector – access to liquidity has helped banks keep their own doors open, that option needs to be maintained (without unduly exposing the British taxpayer – the security of assets is essential).
Some commentators will argue for increased spending, lower interest rates and greater government control of the banks. But we need to act with caution. Confidence and the underlying strength of the economy are the keys to recovery. Measured decisions, good communication and leadership from the prime minister and chancellor will get us through the current difficulties.
We will win the next election if we demonstrate that it is Labour who understands the fears and aspirations of hard-working families feeling the squeeze. If we get the right support in place we can win back those people who are flirting with the Tories and bring out those staying at home because they don’t think Labour are in touch with their troubles and ambitions. Economic leadership is the route to a fourth term.