Off to market with the Tories:
Labour goes shopping for solutions
Kinnock heralds his own 'economic miracle' but workers won't be impressed
As Britain's economic problems mount, JEAN REILLY and JANE WELLS take stock of the situation and look forward to the Labour and Conservative Party Conferences: to see what's in store for them - and us. Once a year the major parties gather to promote their policies and to present their favoured profiles to the viewers at home as well as to the party faithful and not so faithful,
Neil Kinnock will attempt to look calmly in control and for all the world like a prime minister in waiting.
John Smith will lay it on the line about public spending restraint and studiously make no promises (knowing the trade union leaders will be good boys in any case). John Major on the other side will do much the same.
With growing intemational tension over the Gulf, and a mounting economic crisis at home, both main parties are faced with the
FEATURES task of providing credible short as well as long-term solutions to keep the voters happy.
Recession: the facts
Britain appears to be on - if not over - the brink of a new recession. Economic pundits everywhere are forecasting a bleak future, made bleaker if the conflict in the Gulf tums into a long war of attrition and vital Saudi oil production capacity is cut back for any period of time.
All the key economic indicators signal a retum to the problems of the early eighties, with the combination of a strong, over-valued pound (ie when British money, and therefore goods, are expensive, and imports cheap) and rising oil prices hitting profits - leading to a potentially very sharp fall in share prices and a sharp rise in unemployment.
Sterling is now very strong - although it is not as overvalued as it was when recession hit in the carly eighties. But the 'petro-currency" effect, with Britain cushioned from the the inflationary effects of the Gulf crisis by its independent oil reserves, may well lead to an even stronger pound, as other competing economies suffer. In late August the pound reached its highest point in nine years against an (admittedly weak) dollar and at the same time it passed the three deutschmark level.
War in the Gulf
The likely escalation of the Gulf conflict into a full-scale war can only make things worse. As oil production is cut, oil prices will go up. The IMF has wamed that an escalation could lead to recession in the world's seven leading economies as the consequent inflation bites and trade balances deteriorate.
Because Britain is the only major industrial nation which is self-sufficient in oil, its trade balance will not be so directly affected by oil price rises. The rest of Europe, America and Japan however, will suffer. The developing countries with high levels of debt will be worst hit, according to the IME.
But in Britain the strengthening of the pound against the currencies of the major trading partners could significantly worsen the trade balance here by making imports
cheaper. That's an alarming prospect for the figures
Recent govemment.
Britain's visible trade deficit was almost #24 billion in the red in 1989. This means the deficit has more than doubled since 1987. The slump in trade in manufactured goods goes a long way to explain these figures.
The financial markets are worried too about what the
Arab States could do with their S675 billion deposited in Western banks.
Economic slowdown and Tory
"solutions'
In Britain, unemployment has been rising steadily for the last four months and is accelerating. This is due in part to the harsh ap plication of the economic brakes - very high interest rates - over the last two
John
Chancellor years.
Major is clearly prepared to ride out a rise in unemployment, despite the obvious signs that the economy is
The now cooling down.
Tories have done this before in the early eighties; this time however, the stakes are higher because the effects are not so containable.
The Tories" very high inpolicy has terest rale resulted in investment
- starting from a low base - falling still further. The
CBI's July Quarterly Industrial
Trends survey showed that 30% of firms reported that their order books are below normal: the worst since 1983. But the regional breakdown of CBI findings make especially worrying reading for the Tories.
When asked about business optimism, capacity utilisation and plans to shed labour, the south east and west midlands gave the most pessimistic answers. These electorally key regions contain between them nearly fifty marginal parliamentary seats; they have sustained the Tories throughout the boom years of the mid to late eighties.
The attempt to stem the rising tide of credit has now led to bank and building society lending falling to its lowest for three years. Bank lending to the personal sector was growing at
15% a year ago, now it's growing at only 6%.
Even the housing bubble has finally burst: and the Tories could see another section of key voters disappear with it. Mortgage reposessions in the first six months of 1990 have nearly doubled compared to last year, and morgage
FEATURES arrears have risen by 50%.
Europe show that not)
(ERM) of the European Monetary System.
High interest rales and high unemployment: warning signs for the Tories tion to other currencies.
imports more expensive.
in Europe too.
Another central issue which has been exercising the mind of Mr Major over recent months is the question of Britain's entry (or into the Exchange Rate Mechanism lem. Joining the ERM would mean that the value of sterling would be set at a constant rate in rela-
The strength of the pound makes this in many ways a good time for the Tories to join the ERM and to fix rates against the other member currencies at or near their current levels. It would give a clear indication that the pound was going to be held at its present level and not allowed to rise any further, and would offer welcome relief to British capital keen to encourage more sales of British goods at home and abroad, by making exports cheaper and And local
There are two major stumbling blocks, however. With the current low level of the dollar, British firms would still be uncompetitive in US markets, and at the current relative something rates of inflation, they would be uncompetitive
The Tories may well be hoping that a Gulf
War will push up inflation rates in the rest of
Europe, thereby improving Britain's trading position. But tying sterling to low-inflation currencies may well have dire consequences for the British trade balance in the longer
The effect of all this on employment and on standards of living for
British workers is clear. Loss of US markets — still a major trading partner for Britain - will lead to closures and redundancies here. Whilst an over-valued pound may bring cheaper imports, and short-term reductions in in terest rates will give some relief beleaguered to mortgage-holders, none of this amounts to real protection from the effects of inflation and recession, rising unemployment. When the ranks of the
Govemment's previously well-cushioned if not always well-heeled supporters start to feel the pinch, then the
Tories have to worry.
According to a recent
Gallup poll, 47% believe that the economic situation will get worse over the next year. It looks like they're right.
At this year's Tory Party conference, alongside the ritual signals about public spending and tough talking on everything, the Conservatives will have to set the political tone to take them through to the election. The priority will be to reassure their supporters and win back waverers.
In the face of that, and bearing in mind the real political setbacks they have suffered over the last year, they will be looking for victims.
If a Gulf War run by the Americans with
Thatcher in support doesn't offer the same flag waving potential as the Falklands, two old favourites might do the trick.
Wage inflation is seen as a critical contributor to short-lem problems ills, so some union-bashing might come in handy, as well as giving Employment Minister Michael
Howard something to do.
government spending has refused to go away - so if the Tories can find a way of taking housing and education out of town hall control, it might save on poll tax bills as well as giving the impression of doing
Labour's 'alternatives'
Whilst Labour's leaders have dithered on the question of full membership of the EMS,
Page 8 SOCIALIST OUTLOOK no 27, October 1990
they are completely in favour of fixed exhange rates and membership of the ERM as a "mechanism for tackling inflation".
Clearly they believe that the rate of sterling at the point of entry is crucial. But they are apparently less concerned with a competitive rate (ic a low rate) than with stability at whatever rate is set. A low rate would have the effect of reducing the trade deficit and making British firms more competitive. But it would also have the effect of making imports more expensive, further increasing inflation, and therefore reducing living standards for workers in Britain.
Key participants in the Policy Review process have argued that membership of the ERM would be a useful brake on any tendency towards a run on sterling following the election of a Labour govemment.
It is clear that, despite the limitation on domestic policies that would be imposed by membership of the ERM, Kinnock and his co-thinkers are prepared to give up control of, and therefore responsibility for, Labour's policies. Harsh anti-inflationary measures with inevitable attacks on workers' living standards will be defended on the basis that the Labour government no longer controls the instruments necessary to run the economy any other way.
Labour is already paving the way for all this by talking tough on pay and the unions.
Shadow Chancellor John Smith, has warned that in the new Burope, British workers must be careful not to price themsel ves out of the competition. To make sure his message is received, understood and obeyed, most of the central Tory trade union measures will be kept on the statute book. The point will be hammered home further at Labour's own conference in October.
To make sure all this happens, and smoothly, Labour's leaders have prepared the ground carefully.
Determined to avoid the scenes of the seventies when the trade unions brought their apposition to the Labour govemment's wage controls right into the Labour Party, Kinnock is proposing that a weaker conference, with looser ties to the working class, would have less say in drawing up policy. The members, without the means of influencing policy. simply wouldn't matter.
If Kinnock's proposed organisational overhaul gets the go-ahead, we will witness sweeping changes on a scale not yet seen, and the death of what little democracy already exists in the Labour Party. Policy changes have come and gone in the past. But these reforms will make sure policy is made from the top, is passed through the movement as required, and doesn't go have to face any unseemly political challenges.
Crawling up quietly behind Thatcher, and winning the next election by default seems to be as high as Kinnock's sights are set.
FEATURES
POLL TAX TORIES OUT
Poll tax activism remains strong: but only a minority of non-payers are involved
The