Peter Jones: Calculating the real price of victory

Chancellor George Osbornes best hope for maintaining growth is to keep shoppers shopping. Picture: Robert Perry

POLITICS, rather than economics, starts to matter a lot more in decision-making about tax and spending at this stage in the electoral cycle. That applies to tomorrow’s Budget from Chancellor George Osborne, but it is also a pretty universal political truism. So why are some Scottish political leaders apparently oblivious to it?

Of course, being a seasoned political commentator, I am already in full cynicism mode and expecting Mr Osborne to lay out a Budget more geared to the Conservatives winning the 2015 general election than to continued prudent re-balancing of the public finances, though of course he will insist he is doing the latter.

Viewed from a purely domestic perspective, things do seem to be going rather well. The UK economy is growing faster than most people thought likely, unemployment is falling and employment held up a lot better than expected, and the public sector annual deficit is reducing though there is a way to go yet before total national debt starts falling.

People are conscious of that, but still, after five tough years, they may well expect Mr Osborne to ease their tax burdens. But set Britain into an international context, and apart from having a lower unemployment rate than most competitor countries (which isn’t insignificant) and things don’t look quite so good.

The public sector deficit may well come in a tad lower than the 6.8 per cent of GDP forecast in December, but that is still among the highest in Europe, worsted only by the likes of Spain, Greece, Cyprus, Portugal, and Ireland – not an enviable group to be alongside.

The UK economy as a whole should, this year, get back to where it was before the Great Recession struck, but that is one of the slowest recoveries among the G7 group of countries, just behind struggling Japan and much-derided (by Conservatives) France, a year-and-a-half’s growth behind Germany and more than two years’ growth behind America and Canada.

So it doesn’t look like a great time economically for giveaways though politics demands that there should be something. And if Mr Osborne does give the income taxpayer something, would that really be wise?

Much of the recovery has been fuelled by consumer spending which isn’t bad in itself but since it is being driven by a rise in household debt, it may be storing up a medium-term problem.

While the media focus is on the size of the government debt, expected to peak at about 80 per cent of GDP in two years’ time, household or personal debt is much higher, closer to 100 per cent of GDP. Measured against household, rather than national income, the ratio is higher still, at about 140 per cent.

Granted, that is well down from the insane peak of a 170 per cent debt to household income ratio hit in 2008. But I still find it hard to understand why a government debt which, in sustainability terms, is about 40 per cent easier to pay off than household debt, is regarded as intolerable while the size of household debt is nothing to be worried about.

About nine-tenths of this debt comprises mortgages and Mr Osborne may regard new rules which require lenders to inquire much more deeply into applicants’ ability to meet their payments as a satisfactory restraint, though his further extension of the Funding-for-Lending scheme suggests he wants total mortgage lending to increase still further.

There are no new curbs, beyond bank prudence, on unsecured lending, mostly through credit cards, and that too is expected to grow from about £160 billion now to £168bn.

The economic effect, Mr Osborne hopes, is to boost housing construction and keep the consumers buying, which helps retailing and many other sectors of the economy. It may do that in the short-term, but in the medium to long term, as we know from the financial crisis, debt-fuelled growth can turn out to be illusory when a shock occurs.

The shock could well be a rise in interest rates, puncturing what looks like a housing price bubble, especially in the London area, and rendering much credit card borrowing unrepayable. Such a rise is bound to come. The only questions are when and by how much.

We’ll see how much he is willing to risk that problem arising tomorrow. What the economy really needs is a sustained effort to encourage more business investment to create a lot of higher-income and more value-adding jobs, making the economy a lot less prone to boom-and-bust cycles. But businesses, don’t have votes.

And on our own local vote-winning trail at the weekend, following different paths of course, were Johann Lamont and Ruth Davidson, respectively the Scottish Labour and Conservative leaders. Ms Lamont’s interview in Scotland on Sunday indicated that she wanted to use any enhanced power over income tax for Holyrood to increase the top rate on £150,000 plus earners to redistribute wealth.

In Labour Party terms I can see why she might want to do that. Much of Labour’s vote has haemorrhaged to the SNP because of growing anger at perceived income unfairness between rich and poor. Contrasting this Labour agenda against the SNP business tax cuts agenda might bring back a lot of that vote, even though it could ultimately do a lot of economic damage.

Ms Davidson, in her party conference speech, said she would bring back prescription charges, but only for income-earners above an unspecified level, and to pay for 1,000 more nurses. Again, in Tory party terms, I can see her reasoning. It counters claims that the Tories are the party of unfairness, NHS privatisers, etc.

But both leaders seem to be forgetting that there is a referendum to be won or lost before any election. The SNP agenda of promising to cut taxes and raise spending in an independent Scotland may lack coherence, but it is a formula which has won them an outright majority at Holyrood.

Independence is a harder sell, but Ms Lamont and Ms Davidson may just have made it a bit easier. If what they have said is boiled down, and the SNP is expert at doing that, their message appears to be that staying in the union means more taxes and charges. Better but worse off together.

That’s a winning platform? Generally, voters prefer to hear about how they will have more, not less, money in their pockets as I suspect Mr Osborne will demonstrate tomorrow.