What’s in store for the 2015 victor: winner’s curse or a steady recovery?

Even in these fragile political times, May 2015 may not be as unattractive an election to win as it first appears.

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One of the laziest lines in politics is that there are good elections to lose: five years in opposition are rarely rewarding. But it’s certainly true that there are less attractive elections to win and for many 2015 falls into this category. As others have said: beware of the winner’s curse.  

This pessimism is increasingly hard-set. To even raise the prospect of there being any upside in the next parliament is to risk ridicule. This week at the Liberal Democrat conference I was chastised for having the audacity to host an event called sharing the pain and the gain of the next parliament. “Don’t you know it’s only going to be pain?”

You can see the point. Regardless of who wins the election, we are likely to see fragile political leadership, quite possibly in the form of a minority government or an unhappy coalition, being buffeted by strong economic and fiscal headwinds while grappling with the pressures of resurgent English and Scottish nationalism.

Above all, the gloom is rooted in the economic outlook for Britain’s households. Three grey clouds hang over the next parliament, the darkest of which concerns the public finances. Whether it is George Osborne’s £25bn or the £37bn of tightening that organisations like the Resolution Foundation and the IFS have pointed to (and that’s not including the £9bn cuts already pencilled in for 2015/16, nor the £7bn of tax-cuts promised by the Conservatives last week), there is an awful lot of misery still to dish out. All the more so when we are told the NHS needs £30bn of extra resources by 2021 to sustain itself. There is no version of the next Parliament that doesn’t involve severe fiscal pain.  

The second challenge, a family relative of the first, is wage stagnation. Six years of falling pay remains the central economic fact of our times and there is no shared sense of when it will end. Actually, there is: it’s always next year. Most economists are still dazed by what’s happened in part because they didn’t think seriously about the deteriorating wage slow-down that occurred in the years before the crash and thus didn’t reflect on what it might imply for what arose afterwards. Falling pay is not just hurting families, it’s hobbling the exchequer too (due to what the OBR has termed ‘reverse fiscal drag’). A wage–poor recovery will mean a revenue-poor one too.

Add to this the third challenge – the inevitably of higher interest rates bearing down on debt-laden households – and the grounds for anxiety grow. Even if typical mortgage rates only go up by 1.5 per cent by 2018 – which many would say is optimistic - it would add £1500 to the annual costs of a £150,000 mortgage. If interest rates spiked for whatever reason then things could get truly nasty.

So far, so scary – and that’s before we even contemplate what a deflationary spiral in the Eurozone, or a hard-landing for the Chinese economy, might mean.  Yet to imply that any of this is pre-ordained is to over-claim. We shouldn’t get stuck in a doomy-gloomy way of thinking. A counter case for cautious optimism, or at the very least pessimism-lite, should also be entertained.    

The performance of our jobs-market has massively surpassed expectation. Assuming this continues, at some point wage growth will resume at least for a while (a few prescient voices have long maintained this would occur when unemployment falls to 4-5 per cent). Just because the economic establishment was wrong about the point at which wages would grow it doesn’t mean it’s never going to happen. And there are now, very belatedly, signs that a solid recovery is underway in business investment which should eventually feed through into productivity.   

Wage growth will eventually help improve the fiscal outlook; but before then the Treasury may well get a boost when, later this autumn, the OBR’s forecasts of potential output are updated. Even a fairly modest upgrading, to nudge it into line with those of the IMF, could dent the size of future austerity. And let’s not forget that fiscal timetables tend to be malleable. Regardless of anything that gets pledged pre-election, don’t be surprised if greater pragmatism emerges afterwards. A bit of extra time creates quite a bit of wriggle room.

As for interest rates and the so-called debt time-bomb, judging how long interest rates can remain on the floor is always going to be a high-wire act but to date the Bank has shown itself willing to face down calls for a precipitous rise. And to a significant degree the wage challenge and the monetary one offset each other: until wages grow interest rates are unlikely to shift much. 

All of which means it’s possible to sketch out a picture of the next Parliament that is less gruesome than we might think. Steady, job-rich GDP growth. The eventual resumption of pay rises as unemployment continues to fall. A very slow and gradual path of interest rate increases following rises in living standards, assisted by stable inflation and a housing market tamed by tougher regulation rather than the need for higher mortgage rates. And a timetable for chipping away at the deficit that extends over the parliament.

Sure, that’s a very rosy scenario. Any number of things could derail it. It would require plenty of good policy judgement, not to mention luck, for it to arise. Even then it would be a bruising and enervating parliament that would severely test the most robust of governments. But steady growth is a salve to most problems, and to be in power is always to have real choices. Don’t rule out the possibility that the 2015 election winner might not necessarily be as cursed as the current zeitgeist would have us believe.

Gavin Kelly is chief executive of Resolution Foundation

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

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