Friday, 3 October 2008

Cameron's 2010 Hangover

The euphoria surrounding David Cameron's speech to the Conservative Party Conference was predictable with words like "awesome" and "prime ministerial" banded about rather liberally. Of course, it's always easy to praise a speech when you agree with the content. For me, were I Blackadder to David Cameron's Prince Regent and were he to ask me if I wanted to change anything about his speech I would simply say "only the words".

The expectation of election victory is, it seems, for many Tory activists, more about the pleasure to be derived from revenge over Labour than for any desire to start governing Britain.

Now, that's harsh as many Conservatives genuinely believe only they can begin to repair the economic and social damage they believe Labour has wrought since 1997.

The problem is, of course, that the economic "damage" is probably going to be far worse than most of these Tories realise. A superb piece by Simon Duke in Thursday's Daily Mail should be required reading as it emphasises just how bad Cameron's economic inheritance is likely to be.

The headline facts make grim reading:

National Debt likely to be in excess of £800 billion.
Public spending up to 50% of GDP
Budget Deficit likely to be running at £100 billion a year.
Unemployment at 8%
Growth around 1% at best.

This is appalling and for those expecting the Tories to cut taxes immediately is a heavy blow. These numbers mean simply hoping to meet the gap by cutting "waste" is a nonstarter. To deal with this kind of debt will mean not perhaps a choice between higher taxes and reduced spending but the very real likelihood of having to do both.

The other elephant in the economic room is the oil price. Though having fallen well back from its midsummer highs to around $90 a barrel, this has been caused by the dampening in demand in Europe and the US. Two factors still mitigate to keep the price high - the first is the OPEC policy of reducing supply and the second is the continued demand for oil from China.

It's entirely possible that the Chinese Government will instigate a programme of huge capital projects in an attempt to mitigate the effects of the global downturn. This will keep up oil demand. IF we were to have a cold winter in the Northern Hemisphere or there was a sudden outbreak of instability in the Middle east, there's every chance of the oil price spiking up and even if western economices begin to recover, that recovery will in itself trigger renewed demand for oil which could lead to a new oil price spike choking off the recovery.

I've said on before that for most people the "good times" mean cheap fuel, cheap food, cheap credit and rising house prices. I can't see any of these four returning soon and while one or two may return in a couple of years, I can't see the "good times" coming back anytime soon.

For those expecting the "good times" to return with the election of a Conservative Government, this should be a salutary reminder that expectations aren't going to be realised. Even with good fortune and sound management, it will take, in my view, a decade to undo the disastrous policies of the last few years.

The Paulson bailout, heralded a couple of weeks ago as the salavation of the global economy, is valuable in restoring confidence but it won't solve all the problems and there are going to be some difficult times ahead. One hope is the likelihood of a 0.5% cut in interest rates at the next MPEC meeting - as others have argued, the risk is now deflation not inflation. However, the damage may already be done as property prices slump and jobs are threatened.

For all his brave words this week, David Cameron must know winning the election is the easy part. Managing the expectations of all the new Tory voters will be the real challenge and it may well be that his political honeymoon is very short.

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