4 June 2015

The Tories are perfectly capable of blowing up the UK economy


We are at that amusing point in the political cycle in Britain, after a government has won a surprise victory, when the next decade or so is talked about as though it is already mapped out. The widely held assumption is that the Tories have the next election wrapped up, Labour is finished, Britain will vote to stay in the EU, David Cameron will hand over to George Osborne because Boris has had it (he hasn’t, incidentally), and the country will float through until about 2025, with benign conditions prevailing.

One does not have to sink to quoting Harold Macmillan’s most over-used dictum about events, to know that even if some of that comes to pass, not all of it will. A lot can happen in the next five to ten years. Consider, for example, how settled the world and economics looked back in the first year of the new century. Yet, in the decade that followed there was 9/11, Afghanistan, Iraq and the biggest financial crisis since the Second World War.

Also remember 1992, between Sir John Major’s victory and the ERM crisis, when it was fashionable to talk about Labour being out for another generation or more. It was said that the UK was turning Japanese, in the sense that one party would dominate for a very long period. Within five years Tony Blair won an epic landslide and it was the Tories who were out on their backsides, prompting much talk that the Tories would never govern again. But what’s this? Oh, it’s 2015 and the Tories are back in government with a majority.

Perhaps the 2015 election is, as an SNP MP put it to me, “one of those once in a century electoral turning points” because of Labour’s obliteration in Scotland. Although he concluded by accepting that he doesn’t know and “it is too early to say definitively.”

Even so, it does seem highly unlikely that the economy – what really matters – will trundle along without producing any drama in the next few years. I hope that the warnings of an imminent explosion – brilliantly analysed earlier this week by Zac Tate on CapX – turn out to have been way too pessimistic and that we avoid a smash.

Still, history suggests that a newly elected Tory government is perfectly capable of accidentally arranging a massive economic explosion or of being hit hard by surprise external shocks. It happened in 1992 and after Ted Heath’s surprise victory in 1970. Something in the Tory psychology – whether it is relief at winning, or over-confidence, or a tendency to bolster a recovery with funny money ahead of an election – makes the Conservatives prone to post-election trouble.

This time, what worries me is the hangover from QE, or money printing. Cheap money has fuelled an asset price bubble, and when money is cheap southern England tends to have a property boom. Since the financial crisis – which produced a searingly deep recession – house prices in London have doubled, and more, in some parts of the capital. This quite incredible state of affairs is easily explained when one considers the impact of QE and year after year of low interest rates.

Household debt in the UK also passed through another milestone earlier this week. The Centre for Social Justice points out that it stand at £1.47 trillion, a record for the UK. The CSJ is the creation of Iain Duncan Smith, the welfare secretary. Perhaps he could hand a copy of his think tank’s report to his colleague, the Chancellor?

Meanwhile, old school bankers with long memories of previous booms and busts whisper that there are some truly crazy property deals being done now in the UK. It all has a “toppy” feel to it, as one told me last week.

Hopefully, George Osborne will get lucky with international conditions and a soft landing will be the result. Don’t bet your house on it though.

Iain Martin is Editor of CapX