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Stronger growth won’t save Labour

Allister Heath
IT beggars belief that the government is continuing to fight for higher national insurance contributions. Contrary to what their name suggests, these are merely another form of income tax (albeit of a stealth kind which allows the state to pretend that direct taxes are much lower than they really are); the money raised is thrown into the same pot as the receipts from all other taxes. It is a tax on jobs, pure and simple, with employees and employers both being hit; and as we know the more one taxes something the less one gets of it.

The Tories and the growing numbers of business leaders who have spoken out against the tax are right to have done so. The breakdown in the relationship between business and the government is yet another confirmation of the death of New Labour, which was all about trying to reconcile profit-making enterprise with social democratic redistributionist aims. And with the other massive tax increases that kicked in on Tuesday taking their first bites out of this month’s paychecks – in other words, a few days before the election – the tax issue won’t go away for Labour. Many readers of this newspaper are about to be hit by the new top rate of tax, the phasing out of the personal allowance on incomes above £100,000 and the demolition of many pension allowances, among other changes.

But there is one serious piece of good news for Brown, which the Tories are underestimating. The economy is continuing to recover, albeit sluggishly (very strong growth is now impossible given the excessive size of the state, budget deficit and incentive-destroying taxes). The OECD may be excessively optimistic but there is almost no chance of a double-dip recession. We now know that the economy grew by a respectable 0.4 per cent in the final quarter of last year (albeit from a lower level than originally thought) and we could easily see almost as much in the first quarter of the year. Growth of 0.3 per cent is what Capital Economics is forecasting, for example – but it says that it wouldn’t be shocked if GDP came in even higher, with survey evidence indicating a faster rate of expansion. It still wouldn’t surprise me were the third quarter of 2009 to be revised up at some stage – in a couple of year’s time, we will probably be told by our statistical masters than the recovery was a fair bit faster than we originally thought.

But there are several reasons why slightly better growth won’t actually boost Brown’s prospects. He has spent all of his time claiming that the downturn was purely global and had little to do with him, a partly false argument that has nevertheless convinced the public. But it will now be harder to get them to accept that it is his policies that have triggered this return to growth, rather than a global uptick.

Paradoxically, the recovery also boosts the Tories: it is harder for Labour to claim that spending cuts will derail the exit from recession if voters realise that growth has actually already returned. This also helps to explain why Alistair Darling has been talking down the economy. Last but not least, Capital Economics shows that the upturn in overall economic optimism as measured by Gfk has not been fully mirrored by an increase in consumers’ expectations for their own finances, which remain lower than at the time of the previous two elections. We all know that, regardless of the economy’s return to growth, a long and painful fiscal squeeze lies ahead.

allister.heath@cityam.com