Monday, December 21, 2009

Looking on the bright side

Looking on the bright side

Opinion polls don’t tell you much really – a snapshot of the public’s views that depend almost entirely on the differing methodologies of the pollsters for their newsworthiness.  My default position has been the same for a couple of years now – that the Tories will win the next election, and that they will get a decent majority.  Much of the talk of the ‘electoral mountain’ that the Tories face seems to ignore the fact that Blair won his huge majorities by winning seats where it mattered most – the marginals.  It is precisely here that the Tories are doing best.

Nevertheless, the Tories have been decidedly underwhelming these last few months.  Why?  They still hold most of the aces, not least the ideal opponent.  And yet they seem to have been sucked into a deeply depressed narrative – we’re all doomed, and it’s going to hurt.  Now, this may be true, but it does leave them open to a counter-attack from Labour  that, really it’s not as bad as all that, and the Tories’ medicine may prove worse than the disease.  Only one Prime Minister has come to office promising nothing more than unremitting pain, struggle, misery and effort, and the circumstances were a little different.

So, George Osborne’s article in the Telegraph indicates a welcome change of mood, if not of the underlying message.  We’re not quite doomed, it says, but we sure as hell will be if Labour win again.  The analysis that it is based on is pretty sound too – none of those Labour ‘black hole in Tory plans’ shenanigans.

By testing the patience of international investors, Labour are playing with economic fire. As Moody's, the rating agency, said this week: "AAA countries will probably not have the luxury of waiting for the recovery to be secured before announcing credible fiscal consolidation plans." Already investors are demanding higher interest rates on our national debt – heading towards a whole percentage point above the equivalent rates on German debt. If the Bank of England stops buying government bonds next year, as is expected, it believes market interest rates will rise almost another percentage point on top of that.

This is an important point.  The only net buyers of UK gilts this year are the Bank of England (through Quantitative Easing) and UK banks, thanks to a Govt. requirement to improve their capital adequacy.  Fund managers and overseas investors are net sellers.  When QE stops, who is going to do the buying?  And at what price?  This is the risk that people should be worrying about.  The reason that this recession – the worst Britain has faced in 70 years – doesn’t feel as bad as those of the 80s and 90s is that interest rates have been so low.  When you’re up to your eyes in debt, it’s important that repayment is so cheap.  If the price of Govt borrowing goes up (and it is going up already) that will hurt everyone.

So it’s a good tactical message – we really are doomed if Labour get in – that has the added bonus of being basically the truth.  It also leaves the Tories free to run two campaigns, a positive one about the benefits of a Tory Government, and a negative one about the disastrous results of a Labour win.  It never pays to be too negative for too long.

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