Cameron’s Joyless Recovery Threatens Re-Election Drive

Photographer: Jason Alden/Bloomberg

U.K. Prime Minister David Cameron speaks during the Confederation of British Industry's annual conference in London, on Nov. 4, 2013. Close

U.K. Prime Minister David Cameron speaks during the Confederation of British Industry's... Read More

Close
Open
Photographer: Jason Alden/Bloomberg

U.K. Prime Minister David Cameron speaks during the Confederation of British Industry's annual conference in London, on Nov. 4, 2013.

British Prime Minister David Cameron is presiding over a joyless economic recovery that’s doing little to spur his re-election hopes.

As services activity surges to the highest in 16 years, employment climbs and London property prices boom, surveys of voters show that the economy is still their biggest concern. The reason: an inflation rate that’s outstripped wage growth by two to one since Cameron came to power in 2010.

The risk for Cameron is that angst over living standards will undermine a recovery story he’s developing to underpin his campaign for a second term in 2015 elections. That’s frustrating for a European leader who inherited a record budget deficit, a sputtering economy and a banking industry that had just been bailed out by his taxpayers.

“Cameron is winning the argument that the government is better placed to run the economy but a lot of voters are saying they’re not getting anything out of it,” said Stephen Driver, a professor of politics at London’s Roehampton University. “Even as the tide rises, people are going to struggle; they’re going to feel they’re chained to the bottom.”

Elected in May 2010 after 13 years of Labour Party rule, Cameron was forced to form a government with the Liberal Democrats in the first U.K. coalition since World War II. David Laws, the incoming chief secretary to the Treasury, found a note at his desk from his Labour predecessor, Liam Byrne: “Dear Chief Secretary, I’m afraid to tell you there’s no money left.”

Cash Squeezed

Now, it’s British households that are squeezed for cash, says Labour, which is leading in opinion polls by as much as 11 percentage points over the past months.

“Wages for millions of people have been in decline for far too long,” Labour leader Ed Miliband said in a speech in London Nov. 5. “We have a low-pay emergency in this country. More of Britain’s poor children today are being brought up in working families than in jobless families.”

The Institute for Fiscal Studies estimates the erosion of real incomes since 2008 is unprecedented as workers accepted pay cuts as the price of keeping their jobs.

Over the past four years, consumer-price inflation has averaged 3.3 percent and wage growth 1.6 percent, Office for National Statistics data show.

Since Cameron took office, average earnings have risen 5.4 percent and consumer prices 11 percent, figures from the Office for National Statistics show.

Austerity Payoff

Cameron spent his first three years as prime minister promising that his austerity program to restore the government’s finances would be worth the price. It took until this year for the first signs of a payoff.

The European Commission forecast Nov. 5 that the U.K. economy will grow 2.2 percent next year, twice the pace of the euro area and more than Germany and France.

Services activity in October grew at the fastest pace since May 1997, the month that Tony Blair’s Labour Party won a landslide election victory, a report from Markit Economics showed. In September, industrial production rose more than economists forecast, climbing 0.9 percent. U.K. jobless claims fell the most in 16 years in the same month.

Still, the Conservatives trail Labour in polls, with a survey of 1,876 voters by YouGov Plc (YOU) on Nov. 4-5 showing Labour at 40 percent and the Conservatives at 34 percent. No margin for error was given. A poll by the same company of 1,885 adults from Oct. 31 to Nov. 1 found 19 percent thought the government was good for “people like you” while 54 percent thought it was bad.

The cost-of-living squeeze has become the focal point of British politics since the party conference season in September.

Price Cap

Miliband announced at his party’s gathering in Brighton, southern England, that he would cap U.K. gas and electricity prices until the start of 2017 if he wins the election. He would also set up a new energy regulator with power to cut prices.

Cameron’s Conservatives dismissed the policy as a gimmick, saying that the only way to narrow the gap between costs and wages was to build a strong, diverse economy and only the Conservatives have the policies to do so.

Yet Cameron shelved plans to announce a new policy to tackle the rising cost of living at his own party’s conference the following week because he didn’t want to be seen playing catch-up, according to a person familiar with the party’s planning who asked not to be identified because the discussions were private.

On Oct. 10, eight days after the close of the Tory conference in Manchester, northern England, the issue exploded.

Costs Rise

SSE Plc (SSE), one of the so-called Big Six energy suppliers in the U.K., announced that it was raising prices by an average of 8.2 percent. Centrica Plc (CNA), Iberdrola SA (IBE)’s Scottish Power Ltd. and RWE AG (RWE)’s Npower all followed, leading to opposition questions over the government’s commitment to keeping prices down.

Cameron fought back on Oct. 23 with the announcement of a probe into profit and competition among energy suppliers. He also said he wants to “roll back” green levies on bills, which provide investment for renewable energy and help to insulate the homes of people on low incomes, putting him at odds with Deputy Prime Minister Nick Clegg, a Liberal Democrat.

The Conservatives have also been enthusiastic supporters for fracking for shale gas, which they say will bring down prices. On a visit to New York in May, Cameron said he envied the boom in the U.S.’s gas production.

Election Hope

The key for his political hopes is that the gap between wages and household costs eases before the election and the effects are felt beyond London and the southeast of England in northern formerly industrial areas where Cameron will have to win seats if he has any hope of a majority.

“You would expect wages to gain some traction as the economy recovers but it will take some time,” said Alan Clarke, an economist at Scotiabank in London. “The squeeze goes from a vice-like grip to a bear hug. It will probably be another year before wages are in line with inflation.”

Even when that happens the electoral math may make it too big a task for Cameron to win.

The distribution of votes within parliamentary boundaries tends to favor Labour in the 650-seat House of Commons, meaning that the Conservatives need to be several points ahead to win an outright majority. Labour can win by matching the Tories’ share of the vote.

“Will Cameron benefit from the economic recovery?” Roehampton’s Driver said. “My sense is that he will, but not enough.”

To contact the reporters on this story: James Hertling in London at jhertling@bloomberg.net; Thomas Penny in London at tpenny@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.