A Tory or Labour government? A David Cameron/Nick Clegg coalition? Or an Ed Miliband/Vince Cable/Nicola Sturgeon lash-up? Going into the last full week of the election campaign, the outcome remains more in doubt than ever. And all the main parties are fighting fiercely. Yet one possibility hardly seems to have entered the debate or the minds of politicians – that this might be a good election to lose.
With the benefit of hindsight, you could have said this for several British election contests. The most obvious is 1992. John Major’s re-elected government headed straight into Black Wednesday. It took three terms of Tony Blair and Gordon Brown for the Conservative’s reputation to recover.
You could say the same for 1974. Harold Wilson won on the second attempt, but within a year the International Monetary Fund had been called in to bail the country out. It was not until 1997 that the country trusted Labour with the economy again.
Might 2015 eventually be added to the list? Right now, the economic inheritance for whoever forms the next government looks good. The economy is growing. Employment is soaring. The budget deficit is slowly coming under control. Inflation is at its lowest for a couple of generations. The UK is doing a lot better than many of its peers. But that doesn’t mean it will last.
Is this as good as it gets?
Firstly, we might be nearing the peak of what has, by any historical standards, been a very long expansion. After a deep recession in 2008 and 2009, the economy started growing again in 2010. Apart from a brief dip in 2012, it has been growing ever since. We’ve now seen 64 months of continuous expansion.
For the entire post-war period the average length of an economic expansion is 58.4 months (pre-war it was 35 months and in the Victorian era only 26). So unless Gordon Brown turns out to have been belatedly right, and “boom’n’bust” has been abolished, then another downturn is already six months overdue. At some point in the next parliament there will almost certainly be a recession.
We will head into that with a deficit that remains huge by historic standards and with real (after inflation) wages having barely clawed their way back to 2008 levels. If it happens, and it probably will, it won’t be pretty.
We’ve had a lot of help recently
Secondly, while the eurozone crisis has been a big problem, the UK has been helped by a relatively favourable “big picture” over the last three years. The pound slid sharply after the crash and has stayed at those lower levels. Quantitative easing from the US washed across the Atlantic and now money printed in Frankfurt will make its way over the Channel. Global interest rates are at historic lows, which helps countries with lots of debt (that’s us, in case you were wondering).
Migration from eastern Europe and the eurozone periphery has bought in lots of skilled young workers. Each one of those has boosted growth. Yet any of these factors could turn very easily – and once two or three do, possibly at the same time, that will make the going harder for Britain.
Finally, the UK has been boosted by capital inflows, allowing us to finance our vast government and trade deficit very easily. Our trade deficit of 5% a year effectively allows us to consume a lot more than we produce, adding substantially to national output. That has been relatively easy up until now because sterling is still seen as a safe haven, especially compared with the eurozone.
Foreigners have been perfectly happy to buy British assets. But will that be true when there is a minority government, with the threat of another election very soon, and with a left-wing nationalist party taking total control of Scotland? Perhaps. But you wouldn’t want to bet on it. If that overseas money evaporates, that will directly hit our GDP.
There are plenty of disaster scenarios
Other possibilities should be thrown into the mix. Greece might exit the eurozone, triggering a financial panic and even a possible banking collapse. China may fall into recession. A stockmarket crash is as overdue as an economic downturn, and who knows whether all the banks would survive that? Any of those could plunge the economy into a crisis. In short, the odds of the UK economy growing continuously for the next five years must surely be less than 50-50.
And if we go into another downturn, we will be doing so with interest rates close to zero, and a huge budget deficit. There won’t be much left to do to boost demand. Workers who have barely seen living standards rise for five years may well have to cope with another round of reductions. Public spending would need to fall. Will any of that be popular? Almost certainly not.
So as they frantically discuss coalition deals on the weekend after 7 May, at least one or two senior politicians might wonder if it might not be better to let the other side take over for a few years. After all, it might be very hard going – and whoever sweeps into power come 2020 could be there for a long time.