The back room boys in the Labour Party have been doing their sums and have worked out that although the economy in recovering nicely (no need for plan B now) there is not much time for recovery to feed through into better living standards before the 2015 election. These are the same people who swore that Plan A – a mix of fiscal austerity and loose monetary conditions - would never work, so their sums and assumption should be scrutinised carefully. Ed Miliband thinks the key to improving living standards is to tax the country more and then recycle this money in government hand-outs. Passing money from wealth creators and consumers to the poor and workless via the Whitehall bureaucracy. It is highly unlikely that this approach will “add” much to living standards, as it demands efficient taxes on those who can afford the best tax advice and it passes the money to people whose expenditure does the economy least good.
The next problem with this change in policy is that it's quite likely that real incomes will rise quickly over the next 18 months, rendering these arguments and proposed policies defunct. At first sight the prognosis for any improvement in living standards may not look good; particularly if you study the historic productivity data. The data shows that, although employment levels have remained high, output has been low. One might believe this productivity gap to be a consequence of our broken economy, poorly balanced, under invested and reliant on consumption. But through a different lens it could be an indicator of our flexible labour market. And here lies the rub for Labour, they been blind to any positives in the economy and so they believe everything is broken. If they had a more open mind they would be able to see that we could have a quick up-tick in take home pay as we have substantial spare capacity in our existing labour force. Since 2008 private companies have maintained employment levels but have saved money by freezing salaries, cutting back on overtime, and reducing bonuses. But as the economy picks up there could be a very quick reversal. Since 2008 the job market has been static, workers have preferred to see their pay fall rather than risk moving to a new employer. As things turn around there will be a higher velocity in the job market and this will drive up salaries. Also as activity picks up bonuses will return, given that these are normally linked to profits. We might expect bonuses to increase by 10-15% in the next twelve months as bonuses match improved corporate profits. These two factors will drive up living standards for those in work, this will be little comfort to those out of work, this might seem unfair but those on benefits have seen their incomes protected from inflation over the last 5 years, while the rest of us have seen our incomes fall, so this re-balance is welcome to those of us who have seen our incomes fall over the last 5 years.
Figures due this week will show that take home pay in now rising faster than inflation and this will hole Ed Miliband’s arguments below the water line before the starting gun is fired in the 2015 election. This misjudgment combined with the lavish spending promises on housing benefits, energy price freeze and training will expose labour’s plans to ridicule from the very people they need to convince – the working middle classes.
This blind spot is difficult to work out as both Ed Balls and Ed Miliband are clever politicians and Balls is highly experienced. Why then have they jumped from one mantra “Plan A isn’t working” to another “the crisis in standards” when the data and common sense tells us that living standards could well recover quickly in the next 18 months? Perhaps the simple answer is that Labour has to overcome their anger to become an effective opposition and gain the right to govern. The indignation of the left at every coalition policy has clouded their judgement and is stopping them from being a credible opposition. Where does the "Populism" espoused by Ed Miliband come from? The slew of half thought though policies announced at the Labour conference might indicate that Labour’s focus groups are showing a shift in attitudes to the left? But this seems unlikely. Apparently Ed spent two months rehearsing his speech, so the thought that this was a knee jerk reaction to plummeting polls is also wrong. No, the reason for the lurch to the left is driven by a deep desire within Ed Miliband to differentiate himself from his more talented and capable brother. It was sad to see him nail himself into to his own electoral coffin with so much bravado!