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Let’s hope Cameron is for turning

In his New Year message, the Prime Minister claimed to have all the answers. He clearly doesn’t.

In his New Year message, the Prime Minister claimed to have all the answers. He clearly doesn’t.

David Cameron's official New Year message certainly caught my attention. His comments about the economy are unconvincing codswallop. The US has made it clear that fiscal stimulus and tax cuts are realistic alternatives to the spending cuts – alternatives that Cameron ignores at his peril. It could all go bad, and quickly.

Here is a point-by-point rebuttal to his claims.

1. "We have been living seriously beyond our means. We have to sort this out. Every sensible person knows this."

Actually, we haven't been living beyond our means. We have just been hit by a once-in-a hundred-years financial crisis; it takes a while to recover from such a significant shock. There are many different ways to "sort out" this problem and your way is not the only way.

A better way would be to cut taxes and increase public spending as the United States has just done. As Alan Johnson has argued, raising VAT right now, for starters, looks like a really dumb idea.

2. "The national interest dictates that we do the right thing, which is to act, not the easy thing, which would be to delay. In doing so, we should be clear: Britain has a really bright future to look forward to."

It is plausible that the national interest is best served by delaying paying off the deficit, in order to stimulate growth. Only time will tell whether the steps your government has taken are necessary or not.

Judging by historical precedent, there is a non-negligible probability that these policies will turn out to be a disaster. What if you are wrong, Mr Cameron, and the markets turn against you or growth falters? Then what?

Directionally challenged

3. "The actions we are taking are essential, because they are putting our economy and our country on the right path. Together, we can make 2011 the year that Britain gets back on its feet."

They are certainly not "essential" and there is a significant chance that this is the wrong path. For many, 2011 is going to be a year when they are knocked off their feet. An Ipsos/MORI poll published on 1 January found that British people were among the most pessimistic in the world about their prospects. Only 17 per cent said they expected their financial position to improve in the next six months – half the number that thought the same in Australia (35 per cent) and the United States (34 per cent). Three-quarters of the UK workers said they felt less secure in their job than they did just six months ago.

4. "Eight months ago we inherited an economy in deep trouble. The previous government had racked up the biggest budget deficit in our peacetime history."

Again, our economy was hit by a once-in-a-hundred-years crisis – and the actions of the fiscal and monetary authorities prevented another Great Depression. If I recall, Prime Minister, you and your party opposed these actions and were in favour of all the deregulation that ultimately caused the crisis. So what would you have done differently to resolve it? You had no answer then; why should we believe you have one now?

5. "We only have to look at what's been happening in Greece or Ireland to see the kind of danger we were in. Rising interest rates. Falling confidence. Others questioning whether you are still creditworthy as a country."

Nonsense. What has happened in Greece and Ireland is largely irrelevant, as they are stuck in monetary union. The UK has its own central bank and a floating exchange rate. What is relevant is that fiscal austerity appears to have failed in both countries as growth has been compromised. Bad example. And business and consumer confidence has collapsed in the UK since you took office.

6. "Remember, the deficit we inherited back in May was actually forecast to be bigger than that of Ireland or Greece – or any other developed country for that matter. But we have pulled Britain out of that danger zone."

In fact, the UK was never in a danger zone. But we may well be in one soon, when the coalition's misguided spending cuts and tax increases take effect. The public finances have worsened sharply under the coalition. The latest data showed a big increase in both the size of the debt and the debt-to-GDP ratio.

7. "Through the Budget and the Spending Review we've taken some really tough decisions to rescue our public finances and fundamentally change the direction of our economy."

It is true that the coalition has made a number of announcements, though it remains unclear whether the government will change the economy for the better. At this point we still don't know if it has even made any of the "efficiency savings" it trumpeted in May 2010. It is very likely that destroying large numbers of jobs will fundamentally change the direction of the economy. Ask any young person.

8. "So we have a credible plan for restoring confidence in our economy. But we have to see it through."

Judging by the evidence up to this point, you don't. To repeat, confidence has collapsed and unemployment is rising. Your plan is not credible as it is based on an assumption the private sector will step in, in a way it has never done before. Continuously saying you have to "see it through" is a dangerous strategy. Suppose your plan is entirely wrong-headed, as many believe – including me. You will be in big trouble.

Curb your zeal

9. "We're tackling the deficit because we have to – not out of some ideological zeal. This is a government led by people with a practical desire to sort out this country's problems, not by ideology. When we talk of building a bigger, stronger society, we mean it."

You may well mean it, but simply repeating that it isn't ideological doesn't mean it isn't – or that you know what you are doing. Historical precedent is against you. Plus, your response is exactly what a zealot would say.

10. "We are all in this together."

No we aren't. VAT is a regressive tax. The millionaires in cabinet will not become homeless or become depressed because of worries about paying the bills. The poor, the weak, children, single mothers and the disabled are going to pay a big price for this coalition's doctrinaire attack on them. Rising unemployment and inequality make people unhappy.

Thank goodness, Mr Cameron, you are gaining a reputation as someone who is for turning. My advice is to have a plan B ready.

David Blanchflower is economics editor of the NS and a professor at Dartmouth College, New Hampshire, and the University of Stirling

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

This article first appeared in the 10 January 2011 issue of the New Statesman, Here comes the squeeze

Photo: Getty Images
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The Conservatives have failed on home ownership. Here's how Labour can do better

Far from helping first-time buyers, the government is robbing Peter to pay Paul

Making it easier for people to own their own first home is something to be celebrated. Most families would love to have the financial stability and permanency of home ownership. But the plans announced today to build 200,000 ‘starter homes’ are too little, too late.

The dire housing situation of our Greater London constituency of Mitcham & Morden is an indicator of the crisis across the country. In our area, house prices have increased by a staggering 42 per cent over the last three years alone, while the cost of private rent has increased by 22 per cent. Meanwhile, over 8200 residents are on the housing register, families on low incomes bidding for the small number of affordable housing in the area. In sum, these issues are making our area increasingly unaffordable for buyers, private renters and those in need of social and council housing.

But under these new plans, which sweep away planning rules that require property developers to build affordable homes for rent in order to increase the building homes for first-time buyers, a game of political smoke and mirrors is being conducted. Both renters and first-time buyers are desperately in need of government help, and a policy that pits the two against one another is robbing Peter to pay Paul. We need homes both to rent and to buy.

The fact is, removing the compulsion to provide properties for affordable rent will be disastrous for the many who cannot afford to buy. Presently, over half of the UK’s affordable homes are now built as part of private sector housing developments. Now this is going to be rolled back, and local government funds are increasingly being cut while housing associations are losing incentives to build, we have to ask ourselves, who will build the affordable properties we need to rent?

On top of this, these new houses are anything but ‘affordable’. The starter homes would be sold at a discount of 20 per cent, which is not insignificant. However, the policy is a non-starter for families on typical wages across most of the country, not just in London where the situation is even worse. Analysis by Shelter has demonstrated that families working for average local earnings will be priced out of these ‘affordable’ properties in 58 per cent of local authorities by 2020. On top of this, families earning George Osborne’s new ‘National Living Wage’ will still be priced out of 98 per cent of the country.

So who is this scheme for? Clearly not typical earners. A couple in London will need to earn £76,957 in London and £50,266 in the rest of the country to benefit from this new policy, indicating that ‘starter homes’ are for the benefit of wealthy, young professionals only.

Meanwhile, the home-owning prospects of working families on middle and low incomes will be squeezed further as the ‘Starter Homes’ discounts are funded by eliminating the affordable housing obligations of private property developers, who are presently generating homes for social housing tenants and shared ownership. These more affordable rental properties will now be replaced in essence with properties that most people will never be able to afford. It is great to help high earners own their own first homes, but it is not acceptable to do so at the expense of the prospects of middle and low earners.

We desperately want to see more first-time home owners, so that working people can work towards something solid and as financially stable as possible, rather than being at the mercy of private landlords.

But this policy should be a welcome addition to the existing range of affordable housing, rather than seeking to replace them.

As the New Statesman has already noted, the announcement is bad policy, but great politics for the Conservatives. Cameron sounds as if he is radically redressing housing crisis, while actually only really making the crisis better for high earners and large property developers who will ultimately be making a larger profit.

The Conservatives are also redefining what the priorities of “affordable housing” are, for obviously political reasons, as they are convinced that homeowners are more likely to vote for them - and that renters are not. In total, we believe this is indicative of crude political manoeuvring, meaning ordinary, working people lose out, again and again.

Labour needs to be careful in its criticism of the plans. We must absolutely fight the flawed logic of a policy that strengthens the situation of those lucky enough to already have the upper hand, at the literal expense of everyone else. But we need to do so while demonstrating that we understand and intrinsically share the universal aspiration of home security and permanency.

We need to fight for our own alternative that will broaden housing aspirations, rather than limit them, and demonstrate in Labour councils nationwide how we will fight for them. We can do this by fighting for shared ownership, ‘flexi-rent’ products, and rent-to-buy models that will make home ownership a reality for people on average incomes, alongside those earning most.

For instance, Merton council have worked in partnership with the Y:Cube development, which has just completed thirty-six factory-built, pre-fabricated, affordable apartments. The development was relatively low cost, constructed off-site, and the apartments are rented out at 65 per cent of the area’s market rent, while also being compact and energy efficient, with low maintenance costs for the tenant. Excellent developments like this also offer a real social investment for investors, while providing a solid return too: in short, profitability with a strong social conscience, fulfilling the housing needs of young renters.

First-time ownership is rapidly becoming a luxury that fewer and fewer of us will ever afford. But all hard-working people deserve a shot at it, something that the new Conservative government struggle to understand.