Economy

Labour's recession

Editorial
The Guardian, Friday 24 October 2008

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Another winter of discontent they were calling it yesterday, but such glib historical references are way off-beam. For one thing, the recession that Britain is plunging into could easily last more than one winter. For another, the people on strike this time are not public sector workers but bankers who are refusing to do their jobs and lend to each other. The peculiar nastiness of the great banking crisis of 2008 was on display again yesterday: financial markets began the day fretting about a global recession; in the mid-morning, the economic damage wreaked by crisis-hit markets was illustrated with news of a sharp drop in national income; for the rest of the day, markets slid on worries about how a big recession would affect the stability of banks and other companies. Worry piled on top of worry and the result was yet another market panic, with the FTSE dropping 5% and the pound routed.

There will be more such grisly days for some time to come. Financial markets and the real economy are caught in a grievous feedback loop, with a drought in credit forcing businesses and individuals to default on their loans and so intensifying the reluctance of banks to lend. Try as he might, Alistair Darling cannot break this cycle: on Thursday the chancellor prevailed upon bankers to treat small businesses more leniently but secured not one concrete pledge. The result is that even senior figures at the Bank of England admit that a "deep and severe recession" looks increasingly likely, while others talk about a recession that will last for a whole year, with the economy only really recovering by 2011. Yesterday's GDP figures certainly gave no cause for optimism: not only did they show national income falling by far more than most economy-watchers expected, they also revealed that nearly every single part of the economy is in reverse gear. Not just banking but also manufacturing; not only construction but also shops. The only private sector industry to have had a good three months is that tiny corner of the UK economy, farming.

No one can seriously argue that this will not be a recession; the question is whether it will be a Labour recession. There are two possible answers to this: one is the purely negative one in which political opponents use this downturn to attack Gordon Brown's economic credentials; the other is the positive one in which ministers try to show off Labour values amid adversity, to display some of the command they have shown in handling the banking bail-out. There was plenty of the negative stuff flying about yesterday, with David Cameron reprising the rather stale Conservative taunt about Mr Brown's claim that he had abolished boom and bust. True, it was vainglorious of the then chancellor to have (repeatedly) left such a hostage to fortune. But attacks are not the same as answers, and the Tories have not provided any convincing proposals on tackling the downturn. Despite the prospect of job losses and repossessions, the battle between the parties over who can better run the economy remains closely fought.

Confronted with a recession in the early 1980s, Margaret Thatcher and Geoffrey Howe chose to cut public spending, hike taxes and damn the consequences. The result was record unemployment and a downturn that dragged on. Mr Darling, thankfully, has not gone down this route. Borrowing and spending more during a downturn are the right things to do; so was this week's plan to make repossession the last resort. But ministers also need to be clear about how Britain ended up in this state. Talking about a crisis made in Wall Street is not good enough; more honest would be to admit that the UK is uniquely dependent on finance and consumption, and that this lopsidedness should be corrected. Rather than reinstate the old model, better to use extra spending to create another one: a Green New Deal which tackles our energy shortfall and the problem of climate change. This may be a disaster, but it is also an opportunity.