On the fiscal side, the shadow chancellor Ed Balls, unveiled an economic recovery package that seemed like it had been drawn up by a right-wing blogger taking the mick; it simply amounted to borrowing and spending more money. He refused to apologise for Labour’s borrowing – even when the economy was growing – to spend on its public sector client state. But considering that the beneficiaries of that largesse are Labour’s core vote and paymasters his hands are pretty much tied.
This leaves Labour acknowledging the need for spending cuts with one breath, while opposing every single cut the coalition makes with the next. Not surprisingly, the electorate has no clue what Labour’s economic policy is and as a result the coalition consistently outpolls Labour on the economy. Given the importance of this issue, such a lack of clarity will be fatal to Labour’s electoral prospects if it continues.
Balls’s speech may have provided the electorate with some clarification, but only at the expense of exposing Labour as incurable spenders of borrowed money.
The big announcement from the leader of the opposition was Ed Miliband’s frankly bizarre plan to have different tax rates for different companies based on whether he deems them “predators” or “producers”. This violates two of Adam Smith’s principles of taxation: proportionality and certainty.
If Labour hashed the fiscal side it missed an opening on the monetary side. One of the things disproportionately squeezing the middle and bottom, which Miliband talks about so often, is inflation.
Last month the consumer price index hit 4.5 per cent. But this average figure hides a lot. Food price inflation in the UK, at 4.9 per cent, is the highest in Europe. Household gas and electricity prices rose by 10 to 12 per cent over the summer.
This affects different people differently. According to a report published by the Institute for Fiscal Studies (IFS) in June, households in the lowest income quintile spent 9.4 per cent of their income on fuel, compared to just 4.4 per cent in the highest quintile. For food the figures were 19.6 per cent and 10.1 per cent respectively. Rising prices of these goods have a disproportionate effect lower down the income scale. The IFS found that average inflation rates in 2008 to 2010 were 2.7 per cent for the highest income quintile, but 4.3 per cent for the lowest.
The situation is set to get worse. The Bank of England continues to cite the “temporary factors” it has been blaming for the last two years, though it’s unlikely they really believe this. Either way, most observers expect to see inflation break 5 per cent before the year is out.
ALWAYS AND EVERYWHERE
So far Labour has followed Mervyn King’s line. Anna Eagle, shadow secretary to the Treasury, greeted the news of August’s inflation figures by blaming them on the rise in VAT. This ignores the fact that a rise in one price, or set of prices, in an economy will lead, depending on relative elasticities, to lower spending on some other items which will offset this. Only if the money supply is expanded can a rise in all prices take place. The truth that inflation is a monetary phenomenon is still, it seems, to be fully absorbed.
The coalition is probably quite glad to see the real value of the nation’s debt being eroded like this. So, no doubt, are debtors who, after the credit boom, make up a fair chunk of the population. There is a sizeable constituency for inflation.
But lower down the income scale, where Labour’s traditional voters are held to be, there are a sizeable number of voters on fixed incomes, an anti-inflationary constituency, who are getting little representation at present. The printing presses on Threadneedle Street cannot manufacture wealth; they can only transfer it from one person to another. If Labour really does want to represent those at the bottom of the ladder, they ought to start by seeking to protect the value of their money.
Britain’s persistent inflation comes from the Monetary Policy Committee of the Bank of England. It may or may not be deliberate. But it is certainly regressive. While drawing attention to the true source of current inflation, cheap money, would not make up for Labour’s wacky fiscal policies, it would at least give them something to say on the economy. Sound money is, after all, a matter of social justice.
John Phelan is Contributing Editor at The Commentator.