Falling Standards

Seumas Milne writes:

Any thought that David Cameron's coalition might one day be derailed by a Liberal Democrat revolt should be put to bed for good.

Activists at the party's conference in Glasgow this week might have railed at the "evil" bedroom tax as angry tenants protested outside. Vince Cable may have hammed up his differences with Nick Clegg and denounced his Tory cabinet colleagues as "callous" and "blinkered".

But Clegg's praetorian guard swatted it all away. The Lib Dem leader's small-state Orange Book faction is in undisputed control.

What is still a democratic gathering voted to endorse George Osborne's economic strategy, backed Trident, and even made its peace with the student tuition fees the party came to power pledged to abolish. For all the talk of differentiation and coalition with Labour, Clegg and Cameron are indisputably in this together.

The Lib Dems must not let the Tories "hoover up all the credit for economic recovery", the deputy prime minister told delegates who wanted a modest loosening of the fiscal straitjacket.

Now the British economy had started to grow, the coalition had been "vindicated", the standard bearer of the Lib Dem left Tim Farron insisted, echoing Osborne's claims last week to have won the argument on austerity.

It's a measure of how detached politicians are from the people they're supposed to represent that such claims can be made with a straight face.

The idea that two quarters of growth after three years of austerity-induced stagnation and continuously falling living standards, in an economy that's still 3% smaller than in 2008 – and lumbered with a far larger deficit than forecast as a result – can be considered vindication is truly bizarre.

But the coalition is determined to capitalise on the upturn with plans for yet more privatisation of the wreckage of the British economy.

Fresh from announcing the spectacularly unpopular selloff of the profitable Royal Mail (an Orange Book policy), Osborne has now begun the reprivatisation of Lloyds, whose part-nationalisation with RBS five years ago helped prevent the collapse of the financial sector.

If the chancellor is confident of continued growth, he'd raise more by waiting for the price of the bank's shares to increase further.

But he's far more interested in the symbolic value of the sale and the £3.3bn he can pocket ahead of the general election. This is a nakedly political sale in the interests of the Tory party and the City institutions that will profit from it.

Instead of putting these banking behemoths back into the hands of the people who came close to destroying them and the wider economy, they'd be far better used as a motor of investment and growth. But this government (and its predecessor) has insisted on running them at arm's length to be fattened up for sale for reasons of ideological dogma.

The absurd result is that, far from being an engine of recovery, the part-nationalised Lloyds and RBS have been a net drag on lending to households and businesses (to the tune of £5.4bn and £6.7bn in the past year). Even Skipton Building Society has made a bigger contribution to supporting the economy than the 81% publicly owned RBS.

That is especially damaging because the slump in private investment has been at the heart of the crisis from the start.

Instead of filling that gap with public investment – which the coalition government has cut in half – Osborne has tried to kickstart the economy by pumping up housing credit with his Funding for Lending and Help to Buy mortgage schemes.

It's the worst kind of stimulus because it's unsustainable, regionally skewed and does nothing to rebuild or rebalance the economy.

In fact it's a return to the very conditions that paved the way for the crash. Which is why we're already seeing the start of a housing bubble in London and the south-east and an army of estate agents is on the march.

Ironically, given Osborne's claims of vindication, the evidence is that increased government spending over the past year – itself the result of the failure of his plan A and stalled deficit reduction – has in fact boosted growth.

But in any case, the argument was not that the economy would never expand again under austerity. It was that austerity would choke and delay recovery, at huge social and economic cost.

Which is exactly what has happened.

A rise in GDP figures is meaningless to the majority of people when average real wages are £1,500 lower than in 2010 (while the wealth of the richest has increased by £35bn in a year), public services and benefits are being cut and low-paid, insecure jobs becoming the norm.

The inflation rate is now running at more than two and a half times that of average wage increases. Even if real incomes flicker up before the election, Osborne and Clegg will struggle to convince people that the longest fall in living standards since the 19th century is any kind of vindication.

Five years ago this month the collapse of Lehman Brothers engulfed the western world in its deepest economic crisis since the 1930s – along with the model of capitalism that reigned supreme for a generation. Britain's government is trying to restore it at the expense of the majority and failing in its own terms.

If Labour is to offer a real alternative at its own conference next week, it has to come up with some convincing answers about how to go beyond that failed model – and turn round the crisis of living standards in the process.