Saturday, 9 May 2015

What Next? - Part 1

For The Tories

Its worth remembering just where the Tories were before the election, and where they are after. From 2010, the government was essentially comprised of a Liberal-Tory party. There was no meaningful difference between the Liberals and the Tories. In fact, the Liberals, like Danny Alexander and David Laws, were more Tory than the Tories. On pretty much every count, the Liberal-Tories spoke and acted as one party. The combined voting power of that Liberal-Tory party amounted to more than 360 seats, giving it a parliamentary majority of around 80. Today, the Tories have a majority of 12. For all the hype, therefore, it should be remembered that the actual working majority for the Tories has been slashed as a result of the election.

Moreover, with the Liberals themselves effectively wiped off the political map, even adding in their 8 seats, would make little difference to that working majority. But, the change in the size and composition of this majority is extremely significant, for the Tories. Previously, the 60 Liberal MP's were very useful for Cameron. It meant that whenever the Euroseptic right-wing of the party cut up rough, Cameron could simply show them the door, on the basis of being able to count on the votes of the Liberals.

Now, especially as the election has brought in a group of more extreme, right-wing, conservative nationalists, Cameron faces an immediate problem of a growing back bench rebellion, that will demand withdrawal from the EU. Those demands will be heightened precisely because Cameron has fed English nationalistic sentiment, as a means of winning the election.

Labour's Deficit to GDP was lower than it had been under
Thatcher and Major.  There had been no overspending.
In 2010, the Tories saw that the Tea Party, in the US, had shored up the core conservative support for the Republican Party, by adopting an aggressive, fiscally conservative stance. Overnight, the Tories went from promising to match every Labour spending pledge, and widespread promises to cut taxes, including abolishing Inheritance Tax, to a narrative that claimed the Britain was in an economic crisis that could only be resolved by introducing the kind of fiscal austerity that the Tea Party had promoted in the US. It was, of course, dangerous nonsense.

The UK Economy was recovering strongly by the start of
2010.  In 2010 Q2, quarterly growth was 1%.  That is
higher than the Tories have managed in any subsequent
quarter.  It was their narrative and policies, which cratered
the growth they inherited. 
There was no such economic crisis. The UK economy was growing, interest rates were falling, and the deficit not only was not high in historic terms, but it would easily be reduced, as a consequence of continued growth, and moderate inflation, over the next few years. The narrative of crisis was required only for electoral purposes, so that the Tories could carve out a niche for themselves arguing for the need for a fiscally conservative stance in opposition to Labour. The Tories' Liberal partners, themselves argued that austerity would be highly damaging throughout this period, and right through the election itself. Afterwards, it was discovered that David Laws had even admitted that the issue of the deficit had been “hyped up”.

UK Bond Yields were at historic low levels and falling
under the last Labour Government, in 2010, when the
Liberal-Tories took office.  There was no danger of
the capital markets not lending to Britain.
But, having tied themselves into this narrative, it became an albatross around the neck of the Liberal-Tories. Firstly, having put the frighteners into the economy and into the heads of consumers and businesses, it was not surprising that they retrenched sharply, sending the economy into recession. Having created the narrative, the Liberal-Tories then had to make good on its implications, particularly as their ideological backwoodsmen were only too happy to pursue an economic policy that involved making huge cuts in state spending, whether they were actually good or bad for the economy, at that time.

They, were of course, bad for the economy, and sent it even further into decline. Apart from cuts in local government spending, which governments always prefer to introduce first, because the blame for the effects can always be dumped at the door of local politicians rather than the government, the cuts introduced by George Osborne were back loaded, i.e. the main cuts in things like Child Tax Credits and so on, were scheduled for implementation later rather than at the start of the parliament. The political schemer Osborne, obviously hoped that the economy would experience a sharp rebound from the global recession, which would mean that they would then be able to avoid even implementing these further cuts.

But, the idiocy of the Liberal-Tory plan, was that by talking down the economy to begin with, and then by implementing a series of cuts, particularly cuts in capital spending, they removed any potential that the economy might have rebounded quicker, especially as the Eurozone Debt Crisis unfolded, fuelled by the adoption of similar austerity measures across the European periphery at the insistence of conservative governments in Northern Europe.

The Tories face a similar problem now. They have used the nationalist onslaught in Scotland, as the basis for promoting an English nationalist response to it, purely for electoral purposes. Both nationalisms have subsumed class antagonism within national antagonism. The Tories keyed into the ever present conservative nationalism, which is a central aspect of their ideology. But, by whipping up that nationalist fervour, they have created expectations, which they will now be expected to fulfil.

On the one hand, they will be expected to take measures to ensure that Scottish and Welsh MP's are prevented from voting in Parliament on English matters. On the other, they will be under pressure to establish an English Parliament to counter the Scottish Parliament and Welsh Assembly. The dynamic will be to create tensions working towards a break-up of the state. The Tories will undoubtedly take measures that give the appearance of meeting their promises to provide further powers to Scotland, but in a way that will further undermine the Scottish Parliament, and favour England.

For example, Cameron has already made comments about further tax raising powers for Scotland. It will make perfect sense for the Tories to give Scotland full fiscal autonomy, so that it alone is responsible for the spending decisions it makes, and for the taxes it then has to raise to cover that spending. On that basis, Westminster will make huge savings, because it will no longer be responsible for making fiscal transfers to Scotland, out of the Westminster budget, under the Barnett Formula. In so doing, it will accomplish one of the pledges of UKIP to scrap the Barnett Formula, thereby playing to its right-wing, nationalist backbenchers.

But, it will do more than that. By giving such fiscal autonomy to Scotland, without control over either monetary policy or borrowing powers, it will severely hamstring the Scottish government. There remains a possibility that global oil prices may fall again, as over supply continues, but even when long term equilibrium prices are restored next year, the oil price will not rise above around $70-80 per barrel. That means Scotland will have no possibility of raising additional finances from oil revenues. On the contrary, with cheap oil being thrown on to the global market from a range of sources, North Sea oil looks increasingly expensive and uncompetitive, leading to a need for it to be subsidised to protect jobs, rather than being a source of revenue.

A Scottish government will then find its revenue raising powers increasingly limited, and with no power to borrow, far from being a potential centre for “progressive” policies, a Scottish government, whether led by the SNP, or in future by Labour, will find that it has to curtail spending severely. It, not the Westminster government will then take the blame for that austerity directly. In order to attract investment and so on, it will be led to try to undercut the rest of Britain, by offering low rates of Corporation Tax, and other measures that would amount to a race to the bottom.

But, the same requirement to pursue the logic of the nationalist agenda it will have promoted will lead to increasing tensions within the Tory Party, as the euroseptic right-wing presses for withdrawal from the EU. Big business clearly understands that any such move will be catastrophic, leaving Britain increasingly isolated, and under attack from a Europe, which will see it not as a partner, but as a significant competitor and future enemy.

Its not clear how big the remnants of its social-democratic wing now are, but with a wafer thin majority, and an enhanced right-wing, its clear that Cameron is now exceedingly susceptible to be held ransom by his euroseptic right-wing, which has now been reinforced by the presence of its champion, Boris Johnson, who will stand ready to replace Cameron, who has already given notice that he does not intend to serve a full term of office.

Looking at the experience of the Labour governments of the 1960's and 70's that had similar small majorities, but did not face the same kind of sizeable divisions, and rebellions that the Tories now face, it seems likely that Cameron will face the potential of having to call another election within the next year or so, probably after they have re-jigged the constituency boundaries, and following an EU referendum. However, the likelihood that big capital will sit quietly by whilst the Tories create chaos in the run up to such a referendum that risks taking Britain out of the EU seems small. The Tories seem set for a period of even more intensive and bitter in-fighting than they experienced in the 1990's under John Major. They may have won the election at the expense of creating the conditions for their own destruction.

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