Strategy

U.K.: The recession election

Amid fears of a hung parliament, Britain’s fiscal situation is the focus as voters decide who will lead the economic recovery.

A year ago, British police were preparing for a “summer of rage,” fearing that banking scandals and a deteriorating economy might prompt members of the country’s normally reserved middle class to join public demonstrations. The British mostly kept calm and carried on, but on May 6 they will have an opportunity to express themselves non-violently in a general election. Polls suggest Prime Minister Gordon Brown of the incumbent Labour Party (in power since 1997) may be punted. But while David Cameron’s Conservatives are in the lead, the increasingly multiparty nature of British politics raises fears of a hung Parliament.

For the 16 years leading up to Brown’s October 2008 admission that his country was headed for recession, Britain’s economy outperformed European rivals such as Germany and France. As London transformed into a financial centre, the country had progressed from a broken postwar industrial machine into a global services powerhouse. In 2005, as Chancellor of the Exchequer, Brown boasted that Labour Party stewardship had largely done away with troublesome boom-and-bust cycles. “Britain is today experiencing the longest period of sustained economic growth since records began in the year 1701,” he declared.

He came to regret those words. Britain entered its deepest recession since the Second World War during the second quarter of 2008, shedding more than 6% of its GDP from peak to trough. And the misery lasted a full six quarters, longer than any other developed economy. Economists Carmen Reinhart and Kenneth Rogoff observed that recessions lasting more than a year “usually occur only in economies that require deep restructuring, such as that of Britain in the 1970s, prior to the arrival of Prime Minister Margaret Thatcher.” It’s an ominous observation. Thatcher wrested control from the Labour Party in 1979 and embarked on an aggressive campaign against inflation. That tumultuous period divided the country and sparked riots.

Fortunately, Britain seems to be on the mend. On March 30, the Office for National Statistics revealed that the economy exited recession in the final quarter of last year, eking out meagre growth of 0.4%. The latest forecasts point to a sustained but modest recovery, with Bank of England governor Mervyn King repeating often his expectation things will “bump along the bottom” for an extended period. While pay cuts have been the lot of many Britons, the 7.8% unemployment rate remains favourable compared to the U.S. and euro-area countries.

The chief casualty has been the treasury. Bank bailouts and stimulus spending led to huge deficits rivalling those of Greece. The British government now effectively borrows ?’1 for every ?’4 it spends, and the latest projections suggest total debt could reach a precarious 100% of GDP by 2014 — double where it stood pre-recession. Ratings agencies warn that the country risks losing its cherished AAA credit rating. While the U.K. has not traditionally defaulted on its debts, it still controls its own monetary policy and can issue debt in its own currency — and may be tempted to let inflation take care of its fiscal problems.

Britons are divided on Brown’s performance, and generally don’t like him. But Cameron has his own image problems (he’s seen as a toff), and his only experience in manaing economic crises was his stint as a special adviser to the Chancellor of the Exchequer in 1992, when the British pound famously collapsed. Whoever wins this election will find precious few resources to make good on their campaign promises, which likely means rising taxes for debt-laden taxpayers. The British may yet lose their renowned composure.