Labour can’t solve cost of living crisis

 
Allister Heath
ONCE again, Labour is outmanoeuvring Britain’s increasingly hapless coalition. Ed Miliband’s chutzpah will be on full display this week: he will point out that the public is facing a cost of living crisis, while wrongly pinning all the blame for it on the coalition. Miliband is right to flag up the issue. An explosion of costs, taxes and inflation, combined with sluggish pay rises, has cut average take-home pay by 3.3 per cent over the past year. The government has failed to take this seriously, has contributed to the problem and will be paying a severe price.

But responsibility for Britain’s cost of living crisis lies primarily with 13 years of misguided Labour policies – the bill for which the coalition has picked up – as well as with global forces that nobody controls. For Miliband to pin everything on the coalition, which has been in power for less than 10 months, and to pretend life would be greatly different under a Labour government, is wrong. Because we are all so trained to focus on the differences between the parties, we often fail to see the similarities.

Is Miliband calling for hikes in interest rates to tackle inflation? No, both Labour and the government are delighted that rates remain low; both support the half-hearted targeting of a flawed measure of inflation proved to conceal rises to the cost of living. Would Labour reverse the Vat hike? No. Would Labour slash fuel duty? No. Would Labour reverse commodity price increases? No, obviously.

Why are wages not rising faster? The answer is that productivity growth is weak, as a result of years of flawed policies; and because unit labour costs need to fall back into line with post-bubble reality. The only real policy is Ed Balls’ call to cut Vat on fuel back to 17.5 per cent, which would help (but would complicate Vat further and comes after years of petrol tax hikes under Labour). George Osborne will hopefully scrap the 1p hike in fuel duty originally planned by Alistair Darling. But Balls wants to hit the City harder to pay for his plan, further trashing competitiveness.

What about spending cuts to fix Gordon Brown’s massive over-spending? For all Labour’s hysterical claims that all cuts are Tory cuts, it too would have done almost as much. Remember Darling’s crucial 2010 pre-election Budget: laughably, he was predicting GDP growth of 3-3.5 per cent in 2011 (and similar in 2012). Darling’s forecasts for inflation were equally optimistic. Because growth (and hence revenues) would have failed to hit his plans, Darling’s deficit reduction measures would have been insufficient to prevent a crisis. That was the reason why the markets were so worried at the time, threatening a spike in borrowing costs. Yet even though Darling’s budget was faulty, and it would have had to be tightened (probably by hiking Vat) had he been reelected, the Institute for Fiscal Studies estimated at the time that he wanted departmental spending to be cut 3.1 per cent a year in real terms between 2011-12 to 2014-15, with non-protected departments down 24 per cent – enough for war with the unions. Darling even conceded his cuts would be greater than Margaret Thatcher’s, a point long forgotten.

When it comes to the cost of living crisis, the difference between the two parties is trivial. The price of petrol is up 50 per cent – one party might cut this rise to 48 per cent, the other to 49 per cent. Not exactly clear blue waters. We need real ideas, and fast.

allister.heath@cityam.com
Follow me on twitter: @allisterheath