Economic gloom with tax freebies, how does that add up?

Katherine Morgan, Interel Director, digs a little deeper into the rationale behind David Cameron's blinking lights on the dashboard speech #interelGE2015

In Monday’s Guardian, after some more upbeat comments from the Conservatives on the economy of late, David Cameron alerted us to the fact that the ‘red warning lights are once again flashing on the dashboard of the global economy’. But why is he saying this now and how does this fit with the party conference tax giveaways and promising to let us all keep a little bit more through further cutting spending by £7.2bns? Here are three reasons…

 The by-election in Rochester and Strood takes place on Thursday. The Tories are set to lose and by a big margin. So much so that the bookmaker Coral is already paying out on bet of a UKIP victory. While it was once the ‘economy stupid’ it’s now ‘immigration, Europe and the economy stupid’ or so the recent polls and by-elections would have us believe. And these themes have dominated politics of late. But either way the economy matters – a lot. Apart from looking like Wallace, Ed Miliband and Labour suffer in all the polls on economic competence measures and peoples’ trust in them to manage the nation’s coffers. So Cameron is looking to switch the debate back, in this critical week, to his terrain and terrain where the Conservatives lead in the polls against all the other parties.

Cameron and the Conservatives are treading a fine line. They want credit and more importantly votes for restoring the economy, they can gloss over the length of time it’s taken us compared to other Western economies, and want to claim that austerity has worked. But, equally the message is to watch out, we’re not there yet, we need another five years to deliver. We may be on an economically sounder footing but you certainly can’t trust Labour in these uncertain times.

Second, after his promise of £7.2bn giveaways Cameron is also trying to steady the ship and look like the serious party on the economy again. While the tax cuts sound great to many of us, last week the Financial Times ran a series of articles clearly setting out that the plans suggested by the Conservatives indicate that they are willing to trade votes, and political popularity, for economic credibility. Indeed, they argue that the tax cuts are simply not deliverable, at least not without swinging cuts to the services that we all rely on. Moreover, they argue that the numbers being used are either wrong or based on very different assumptions to those used by the OBR. Senior Treasury officials are even being quoted in the press (and it is highly unusual of them to break ranks) as being doubtful about the ability to deliver on these proposals. So yesterday’s speech was perhaps a sobering line in the sand after the conference party.

 Third, the Autumn Statement is in two weeks’ time. The economy is doing better and has rebounded in recent months but this is based on shaky foundations. We are still a long way from a full post 2008 recovery. As a senior Treasury official mentioned last week, the harsh reality is that it’s not just our generation who will be impacted by the crash. In fact our children will be paying for the events of 2008 through a reduced welfare state and higher taxes for the whole of their working lives.

 Indeed, employment may be up but wages are still down, as are tax receipts, as new labour market entrants are working in largely low paid or part time roles. There is likely to be some bad news, or perhaps less good news, when Osborne arrives at the despatch box on December 3rd. The CBI has just reduced its growth forecast for 2015 from 2.7% to 2.5% and the Bank of England is expected to revise down its own figures shortly.

 So there are three reasons why. But promising a richer future tomorrow while ringing the warning bells today will be a fine balance for the Conservatives to tread.

Author

Katherine Morgan

Partner and Group Head of Financial Services

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