The debt bomb ticking underneath Gordon Brown's electoral hopes

George Bridges, until recently David Cameron's campaign director, has a must-read article in this week's Spectator.  George has been mining the records of Experian, the credit rating agency.

He discovers that 5.1 million households have 'sub prime' credit ratings and these are overwhelmingly concentrated in the seats that we need to win in order to oust Labour:

"Labour won its 20 most marginal seats by a combined total of just over 9,000 votes. And - crucially - there are almost 100,000 households in those 20 marginal seats that are in the subprime category. Several Cabinet members may find the repo company - rather than the local Tory candidate - to be their greatest political enemy. In Bolton West, Ruth Kelly's seat, some 7,200 households are in the high-risk group, a figure which dwarfs her 2,060 majority. In Jacqui Smith's seat of Redditch, Experian places 10,800 households at risk. The Home Secretary's majority is a mere 2,720."

This is George's conclusion:

"Ever since the Conservative leader worked in the Treasury, watching the pound fall out of the European Exchange Rate Mechanism, Conservatives have shied away from focusing on the economy. Now they must do so with a vengeance. An attack narrative must be formed: Gordon the stealth-taxer, serial spend-and-waster, the man who jilted Prudence and led the nation into an asset bubble. The man who inherited an economic boom, and went on to oversee the largest orgy of property speculation and debt creation in British peacetime history - how can you trust him again?  Whatever the results of the credit crunch, it is fairly clear that its first casualty is the feeling of prosperity. It is giving way to something that we have not seen in politics for some time: fear. Fear that the bills will keep on rising faster than one's salary. Fear of the day when your mortgage comes up for renewal. After an absence of 15 years, economics is back at the heart of politics. People are looking for assurance. And the next election will be won by the party that is most trusted to provide it. For millions of voters and David Cameron, it is payback time."

Is George right?  Is the economy about to become issue number one?  It might be the only issue that could give the Tories a working majority.  Despite recent double digit opinion poll leads the consensus within the Westminster village is that Britain is heading for a hung parliament. 54% of the political insiders who contribute to the new PoliticsHomeIndex are currently predicting a hung parliament as the most likely outcome of the next General Election - with the Tories the largest party.

The right economic strategy may be the difference between being the largest party and the majority party.  As Fraser Nelson points out, elsewhere in The Spectator, the electoral mountain is still a huge one for the Tories to climb and he notes the various attempts by Team Cameron to stay close to the Liberal Democrats.

Comments

[Andrew Lilico]

It seems to me that the damage to Labour's economic credibility is either already largely done (with City Editors in respect of issues such as Northern Rock and the CGT reforms) or about to be done for us by events (with the general public). Six months ago I was keen on attacking on this issue, and urged as much. But now I think things have changed, and that the key challenge will be for us to offer some story about how things might be different under us. Some issues:

- Would we really have handled banking regulation differently? How? (We have a good story on this - it needs wider circulation.)
- Would we propose additional financial regulation now? If so, what? If not, why not?
- There is the allegation that Brown has fueled a credit boom. What would we have done differently? Are we saying that if government spending had grown less fast then UK household debt would have grown less fast also, but following the government's "good example"? (That doesn't seem very credible.) So, are we saying that we would have had more extensive regulation of lending? (!! Surely not!) So, are we saying that we would have wanted interest rates to be higher? How would we have achieved this? Would we have had a different inflation target (e.g. a lower inflation rate or a different index)? Would we have had "price stability" defined slightly differently such that it took more account of factors such as credit growth (e.g. a two-pillar approach including a monetary growth target, or perhaps a price-level target?)? (All this is currently most unclear.)
- Are we saying that the government didn't moralise enough about debt and self-restraint (didn't use its Rooseveltian "bully pulpit", which Cameron seems to admire) concerning debt? This is an interesting (and not-implausible) thought, but can we credibly claim that we would have anticipated the danger and acted upon it earlier?

In my opinion, our current task should be to unpack our answers to the above questions. Then we might be close to the magic combination of Labour economically incompetent + Conservatives economically competent = overall majority.

[David Belchamber]

Yes, the economy is the obvious target because we are set for a bumpy couple of years and some of the blame can be shown to attach to Brown personally.

Cameron's "the cupboard is bare" is an excellent line but Brown's credibility can also be whittled away incrementally: the extra on fuel, council tax, enery costs, beer and fags, the abolition of the 10p tax band.

We must get our retaliation in first sometimes by demolishing his "fake facts:

"The UK has higher interest rates than the EU and the USA, it has a real inflation rate that is higher than the EU and the USA and unemployment, when you add in the NEETS, is much higher than the conservatives ever had".

Also we should not let go the panic that Peter Bottomley's last question at PMQs yesterday caused Harriet Harman. She had done pretty well until he asked her about the difference beteen the RPI - the real cost of living index - and Brown's preferred CPI. She was totally flummoxed and stuttered that she would get the Chancellor to write to the Honourable Gentleman.

If the Deputy PM cannot deal with such a straighforward question, it would embarras Brown and the others if we perservered with this line of attack.

[Letters From A Tory]

The enormous victory needed by the Conservatives at the next election shows how desperately we need serious electoral reform in this country.

[Serf]

Would we have had a different inflation target

Got it in one.

Brown's Enronesque fiddling, led us into high inflation an low interest rates. Real prudence would have kept the old measure of inflation as a target.

here would have been less of a credit fueled boom, but less risk of a crunch.

f course we should point out that Brown needed the boom, to pay for completely useless government spending iniiatives. At the ame time this spending helped fuel inflation.

[Tony Makara]

The plastic chancellor built a plastic economy with plastic credit cards. Now that the debt-fuelled spending has dried up the feelgood factor no longer resonates with voters and those who bought a home, in good faith, believing its value was assured, now have to endure watching their property plummet in value. This is all bad enough. However the worst is yet to come. Last year no less a body than the International Monetary Fund concluded that the pound was massively overvalued and due for a considerable depreciation. HSBC and Citigroup have also predicted a big fall for the Pound with Capital Economics forcasting a 10% plus depreciation over the next two years, two years that will run up to the next general election. As Sterling loses value, particularly against the Euro, the cost of EU foodstuffs will soar. This will produce the sort of voter-visible inflation that the Labour government fears. The fact is Labour are now trapped, the economy has stagnated, credit has dried up. However any attempt to improve liquidity by cutting rates will weaken Sterling and that on top of a currency that is already overvalued and heading for a natural correction will import considerable levels of inflation. The plastic chancellor's plastic economy is about to melt.

[Mike]

The next election will most defintely revolve around the economy. How can it NOT do so?

Two lines of attack are needed.

Firstly a total demolition of 'prudence' and 'an end to boom and bust' and a relentless highlighting that the cupboard is bare.

Secondly an indication of how a Tory government would put more money in peoples' pockets. I reckon Osborne needs 3 distinct plans. Plan 1 for what he could say now without frightening the horses, plan 2 for a 'blip' recession and plan 3 for if things turn seriously nasty.

I disagree with Andrew Lilico (above) on one point. I don't think we should waste any time getting dragged into a 'what would you have done?' debate. It's pointless, irrelevant and there's absolutely no mileage in it.

[Andrew Lilico]

Mike@10:11

But if we don't offer any credible story abotu how we would have done things differently, our attacks on the economy will look like doom-mongering. We will be Chicken Little's, saying "The Sky is Falling In! The Sky is Falling In!" but why should that mean anyone will vote for us? Saying that stuff has gone wrong under Labour is all very well, but I think that, at the moment, the public is not convinced that that is really Labour's fault - that things could really have been done differently.

Now, things not being Labour's fault may not matter - it may be enough that people cease to credit Labour with doing *better* than anyone else; we may not need them to believe that Labour does *worse* than us. But I want us to try to convince the public that a Conservative government will be superior on the economy - not merely no worse.

[Chad Noble]

I seem to remember the last time Cameron looked at personal debt, he concluded that the public were 'tossers'

[LetwinWatcher]

Remember this quote from Oliver Letwin...

"Cameron Conservatism, so far from being merely a set of attitudes, has a specific theoretical agenda. It aims to achieve two significant paradigm-shifts. First, a shift from an econocentric paradigm to a sociocentric paradigm. Secondly, a shift in the theory of the State from a provision-based paradigm to a framework-based paradigm."

Not looking very clever in retrospect!!

[Tony Makara]

Andrew, a starting point must be to nail the myth being put about by Labour that the credit-crunch was 'Made in the USA' and is nothing to do with the government.

Gordon Brown has used credit rather than increased productivity and better wages to increase spending power which has largely gone on imports with the strength of Sterling masking inflation. This has been a deliberate strategy by the Labour government and the blame must be pinned on Gordon Brown for encouraging such wanton spending, very little of which has gone to British producers as demonstrated by the decline of our manufacturing industry. I personally know of someone who regularly goes to Spain to play golf at the weekend, all paid for by credit, his attitude being that he will 'live it up' while its available. This is the sort of irresponsible debt that has been encouraged by the government to promote a feelgood factor.

The Conservative party cannot let Labour get away with this, and most promote the value of saving and investing. This has become a Viv Nicholson economy based on the philosphy of "spend, spend, spend" blame has to be attributed to Labour for the cultural change they have brought about.

[passing leftie]

A Tory government would have done less to prevent a credit boom than this Labour one. Would you have regulated? Introduced credit controls? Forced lenders to ensure a 10% deposit on houses? Regualted the banks. As if. You've got nothing.

A poor economy is a prerequisite for a Tory victory, the question is will they believe you when you say it's the fault of Labour rather than an international downturn, and whether you have any credible policies which would have prevented this.

I'm not going to get into the CPI think again, expect to say - will Osborne promise to use RPI when he gets in?

As for the RPI figures, they also have significantly lower under Labour than under previous Tory governments. What will the Tories do to control inflation? Take interest rates out of the hands of bank of England? Introduce price controls on staple priducts? Introduce capital gains tax on houses?

[London Tory]

@ Passing Leftie

The first big change you will notice from a David Cameron government is a complete freeze in the unsustainable expansion of non jobs in the public sector. London council tax payers have just had the 08/09 bills drop through their letter boxes. Livingstone's City Hall takes an ever increasing wedge, all to pay for his vast bloated army of cronies and advisers, many earning over £100,000 p.a in complete non jobs.

Judge the success of our next Tory government by how quickly Society Guardian goes out of business.

[Mike]

As things stand the Labour government are getting away with claiming that all the problems are imported form the US however untrue this may be.

However, even if the public don't directly blame Brown for the problem they sure as hell expect him to do something about it now it's here.

As others have noted, he's painted himself into a corner and can't do anything meaningful without upsetting his client state.

Like I said before Osborne needs to be prepared for different scales of economic woe. Right now he could only offer 'balanced book' tax cuts. Once Darling fails to balance the books Osborne can be bolder. If it all starts to head south rapidly then the public will be looking for a very bold Tory alternative.

[Jonathan Powell]

I tend to agree with Mike that focussing on what the Conservatives would have done differently is largely irrelevant. For one thing, it's far from clear that Labour (or anyone else for that matter) is to "blame" for the current economic situation (with the exception of Northern Rock, and I think the Tories can make a strong case that would have been better handled under the pre-1997 system) and for another the public tends to praise or blame the incumbent on the current economic situation whether they deserve it or not--Labour's reputation for economic competence was based on the economy they inherited from the Tories and has already started to collapse.

Instead, the Conservatives need to focus on what they would do today and in the future to help people struggling to pay their bills. Tax cuts would seem like a good start, making the case for higher interest rates (as a lot of this stuff about the "true" cost of living being higher than the index targeted by the BoE would seem to imply) might not be smart politics at the present time.

[Andrew Lilico]

passing leftie's questions/challenges, as so often, are the right ones. However, she/he is (as so often) incorrect in thinking her/his questions are unanswerable.

- We do not believe that banking regulation has been handled optimally. We do not believe it was wise to have taken prudential supervision away from the Bank of England, and we would return it. Going forward, we also argue that there should be more account of liquidity in the Basel bank accords.

- Mortgage broking regulation was introduced following an FSA decision in 2003. This was probably a mistake and a Conservative government wouldn't have done it (indeed, the FSA wouldn't have done it if the Labour government hadn't instructed it to), but was not the cause of excess lending.

- The switch to a CPI target was done in 2003 for entirely political reasons. It was a slightly inflationary switch (raising the inflation target by an effective 0.3%). The Conservatives might have switched eventually to a version of CPI in which housing costs were included. This switch definitely made matters worse, but was not the sole source of the housing or credit booms. Indeed, its effect came late in the boom - perhaps serving to make it worse (Northern Rock might not have gone the way it did had there been a different inflation target) but was not the cause of it.

- I think that our "seven years of plenty/seven years of famine" story is a resonant (and almost unarguable) one. The government has allowed a significant growth in debt since 2002. Even though it isn't true that "the cupboard is bare" - there's nothing to stop Darling from running a £100bn deficit now if he wanted to; UK government debt isn't particularly high by international standards - even though it wouldn't be true if *we* were the government (Norman Lamont was happy to run much larger deficits than Darling is), Labour has less room for manoeuvre than we would, and has not used its more limited room for maneouvre well. Again, government deficit financing was not the *cause* of our current problems. But on this point our critique has bite, because it means that even if the government didn't cause the problems, it hasn't placed itself in a position where it can now help to alleviate them.

- It is possible that a Conservative government might have intervened to change the inflation target earlier (say, around 2000/01) because we would not have been insecure about the need to prove we were resolute in fighting inflation, and so did not need the fig-leaf of central bank independence (which Brown did). This might have meant that we changed the monetary policy framework much more dramatically at an earlier stage so that money supply growth didn't get out of control. Indeed, I think there is a good chance that this is precisely what we would have done in practice in government, but I think our chances of convincing anyone of this are currently somewhere between slim and none.

Insofar as there is any story concerning how we would have attacked the cause of the problem it can lie only in the last point. But if we are to do anything about penetrating the public mind here, we need first to penetrate the mind of the City editors (who I suspect would be totally unconvinced at this stage) with a much more sophisticated and subtle critique of the current monetary policy arrangements. These are, in my view, flawed - but only in subtle ways. We need first to understand those flaws within Conservative ranks (which we do not), and only then can project an account of the flaws (and how to address them) externally. Our current sole policy (preventing a Bank Governor from being re-appointed) is, in my opinion, plain daft. We have to do better than that. We can.

[David Bodden]

Questions such as ‘would the Conservatives have done anything different’ and ‘what will they do in the future’ are immaterial to the objective of getting rid of the nuLieBore regime. What needs to be done is to highlight the suffering of people in the key constituencies such as those of Ruth Kelly and Jacqui Smith in the article. Even if the fault does lie with the borrower it should be blamed on the nuLieBore party.

Only when the population has the brown stuff running down the back of their legs will they vote this evil bunch out. The Conservatives are still toxic. What needs to happen is that nuLieBore is seen by all to be even worse and this isn’t happening.

[George Hinton]

One needs to be a bit careful here.

Debt is a very emotive subject and is also a two way issue. People do not get into debt willingly, and in normal circumstances WOULD NOT be allowed to. However the debt fuelled orgy of spend that we have experienced over the last few years is not down to Gordo the Ineffectual on his own. Banks and Mortgage Companies and other lenders, have been only too pleased to lend monies, at absurd ratios, for any purpose, to people who in normal circumstances would have been hard preseed to raise the price of a second hand car on the drip. It is these organisations and the credit card companies, who have brought many to their knees, mired in debt, with no light, for any forseeable future, at the end of their personal tunnels.
It's no good going around and blaming Gordo for the position that individuals have got themselves into. Rather we should be raising the spectre of more taxes and more stealth taxes, as a means for Gordo to get himself out of the hole that the economy is in. A measure that the ordinary "joe" is going to pay for, a measure that is denied him, as he finds pay rises restricted in the public sector and interest rate rises bite deeper into his increasingly smaller pay packet. It is the horror of a declining life style, less holidays, smaller/older car, less luxuries etc that we should be stressing.
Blaming it all on Gordo would not be correct and would allow NuLab's spin doctors to beaver away with comparisons of the '70's and '80's.

[ramsay]

I'm not George is the best placed person to look at electoral strategy!

[Chad Noble]

It is a difficult one for the Tories to attack Labour on tnis right now, as when you have big figures like Soros saying the current problems are the worst since the Depression, as it not only lets Labour off the hook in the public's eyes, it enables them to compare interest rates now to those under the Tories.

15% was really, really painful. The early 90's were a lot more painful than today and it is not going ot help Cameron to give Brown opportunities to remind everyone.

Of course it could all well get a lot worse, so seeing as they have no real answers, I'd tell Team Cameron to keep their traps shut and just let Labour take the heat.

[Frederick James]

Marginally on topic, it is amusing to see the scales finally falling from the eyes of an arch-apologist for this rotten Government:

http://tinyurl.com/3blthe

The article is less remarkable for its content than for its author, Peter Riddell.

[Tony Makara]

Chad Noble, we wouldn't need high interest rates to quell inflation if we did more to produce and serve our domestic market. As long as we are over dependent on imports we will always have our economy policy dictated by currency differentials and imported inflation. David Cameron's call for a revival in British manufacturing is a step in the right direction. Price instability and boom and bust are directly related to the question of import dependency and currency differentials, a floating currency does not resolve these problems. The more we are able to produce and supply our home market, the less we will be exposed to such instability.

[passing leftie]

Posted by: David Bodden | April 03, 2008 at 11:21
Even if the fault does lie with the borrower it should be blamed on the nuLieBore party.

And here the hypocrisy of certain Tories is laid bare. If debt is the purely the free choice of individuals in a free market, how can the government be blamed? It was this attitude which lead to the ridiculous debt boom of Lawson. Of course it's not as simple as that.

The issue of personal responsiblity assuming vaccuum of circumstance has always been a mistake of the right, conversely, blaming everything on circumstances a failing for the left. Are people getting fatter simply because we are all more greedy, or is it because there is more cheap highly calorific food around? Is their more debt because people in general are feckless and irresponsible, or because credit is too freely available?

[Mike]

passing leftie, hasn't Brown over the last 11 years never tired of claiming that he'd put an end to boom and bust?

Could he not see that racking up debt is not what you'd actually call 'sustainable'?

You can argue the toss over who is to blame for the debt crisis but when push comes to shove the population will be asking Brown 'didn't you see this coming', 'can't you see we're suffering' and 'what are you going to do to ease the pain?'

The answers as they stand appear to be 'no', 'no you're not' and 'nothing'.

Not exactly the position of a towering clunking fist economic genius is it?

[Joe James Broughton]

Tony - I agree, but not easy to do - if anything we face being under cut further but eventually wages will rise in the East and trade will increase both ways.

[asquith]

I was in the pub one day and someone on benefits was complaining about how he couldn't buy anything and was in debt.

An old man turned to him and said "If you can't afford it, don't f***ing have it".

Houses, expensive holidays, cars, children... it's the best advice. If we do go into a recession, hopefully it will encourage people to scale down and be more responsible. It wouldn't be hard to link this to environmentalism.

[asquith]

And lest anyone get the wrong idea, I earn less than £20,000 a year and have to pay all the relevant bills. And still save thousands a year by tightening my belt and not being married or having children. A number of my peers are in debt, but it isn't for me.

[Tony Makara]

Joe James Broughton, I am particularly worried about the prospects of basic foods becoming more expensive should a considerable differential exist between Sterling and the Euro. With EU states it won't be a case of wages equalizing the situation because they are already properly waged. Its pretty clear that the ECB is on an anti-inflationary course and that means little by way of rate cuts, which means if the MPC decides to cut here, as it needs to do in order to re-boot the economy, Sterling is going to fall against the Euro, this combined with the fact that many now believe the Pound is likely to fall in the same way as the Dollar, we are going to have a serious problem with food costs. We can manage without manufactured wares but not without food. This is a very possible, even likely scenario, and stresses the importance of Britain having a large agricultural base.

[DavisFan]

Tony Makara makes a number of very sound points.

Autarchy is clearly the best aim for Government.

Foreigners are, after all, SHIFTY.

[passing leftie]

You can argue the toss over who is to blame for the debt crisis but when push comes to shove the population will be asking Brown 'didn't you see this coming', 'can't you see we're suffering' and 'what are you going to do to ease the pain?'

You may well be right that Brown will get blamed, despite the fact that this is a world economic issue. He's not charismatic in the same way as Blair or even Cameron, but he's managed the economy over a longer period succesfully more than anyone else. Low inflation (yes, RPI too), very high employment, some redistribution to the lowest paid, and the highest disposable income in real terms after tax that we have ever had.

We'll see how the British economy weathers it compared with other economies.

Personally, I think that Northern Rock will be sorted by the next election, and that the economy will be looking up after a steep downturn over the next 18 months. But what do I know?

[Serf]

The credit boom was largely fueled by house prices. House prices were fueled by two things, immigration and loose monetary policy.

A prudent government would have....

limited immigration and used the correct inflation target. It would also have declined

Northern Rock was a regulatory diaster. The result of revolutionary changes in regulation is always a lesson in the law of unintended consequences.

[passing leftie]

The credit boom was largely fueled by house prices. House prices were fueled by two things, immigration and loose monetary policy.

Oh, crap! I might have known you'd be able to blame it on immigrants somehow.

[Malcolm Dunn]

Is it crap Passing Leftie? Why? I notice that despite your protestations about most people being better off after Darling's budget 26 Labour MPs have called for the reintroduction of the 10p tax band. The wheels are falling off the new Labour bandwagon. Thank God.

[passing leftie]

Is it crap Passing Leftie? Why?

Can you name a single serious commentator on economic issues who believes that immigrants are to blame for the UK credit crisis? I'm even having problems finding a silly one (other than you and serf). Just to give me a full house, is it also the fault of the EU and gay marriage?

notice that despite your protestations about most people being better off after Darling's budget 26 Labour MPs have called for the reintroduction of the 10p tax band. The wheels are falling off the new Labour bandwagon. Thank God.

I think it was a mistake to get rid of the 10p band because it makes a bad headline. But people are still better off. Do you dispute the the Times tax tables by KPMG?

[Mike Routhorn]

passing lefite - 'I think it was a mistake to get rid of the 10p band because it makes a bad headline. But people are still better off.'

A bad headline? A BAD HEADLINE?

And by 'still better off' presumably you mean if people go begging for their own money back via tax credits.

Such social justice. Such dignity for the working poor.

[Patsy Sergeant]

Just what I was going to say Mike Routhorn - 'A bad headline'? That is such a typical Labour approach to any situation, as we have seen over and over again during the last ten years. But of course 'passingleftie' is sure to concoct some suitable (to him) rebuff to us.

[passing leftie]

The NET EFFECT of the budget was to make almost everyone in country better off in terms of income tax. No one here has dealt with that substantial point, nor will they because it is incontrovertible.

The problem is that despite this, abolishing the 10% rate can be spun by dishonest Tories and the Daily Mail into making it look as if they are worse off. That's why it was a bad idea. It's only a few people look in depth at figures to see what's really happening.

The only critique I've heard is that you don't like tax credits. Well, argue that then.

[Bob Macdonald]

Labour has put in the foundations for the most profound destruction of national wealth since WWII. Think about it: the vast majority of the country's wealth is comprised of housing valuation. Housing is now set to drop minimum 30%; I say more likely 50%. So, a 50% drop in national wealth in the course of two years. Now factor in the highest personal debt levels in history. That's a mess. And people are going to get a lot angrier. If the Tories can't work with that, then step aside, because other political forces will get the job done. Be sure of that.

[Matt Wright]

I'm suprised some of you haven't mentioned the pensions crisis fueling house prices. People invested in houses, pushing up prices, because they had no faith in pensions anymore. Brown was at fault here as well.

Back on the particular topic, I think we have to highlight what Brown did wrong but also its vital we offer a positive vision of what we would do better in the future. Something I'm sure will happen.

[Joe Broughton]

I agree with Matt Wright's point above. Housing was considered a better investment.

I was calculating my Pension Scheme two weeks ago and am quite alarmed by how poorly these schems are performing now. If it wasn't for the company contribution, it would probably not be worth having. I'd advise most people to try to take control of the matter more themselves and if they haven't got a company scheme, to put it into a good building society.

The Conservatives need to return to the Pensions raid and give the government an extremely hard time over it. There are a number of ideas about how to make Pensions more attractive, but we don't want those ideas pinched.