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Wednesday, 16 May, 2001, 09:21 GMT

The economy set fair?

by BBC News Online's Steve Schifferes

Labour has made its management of the economy the centrepiece of its election campaign, pledging low inflation, low mortgages and sound public finances.

Labour says its policies on the economy have eliminated "boom and bust," with the pattern of steady economic growth set to continue.

But the Conservatives are warning that economic peril could lie ahead, as the world economy slows down, and that Labour's tax and spend plans are unsustainable.

The Liberal Democrats, in contrast, believe that the country should invest more in training and investment, while arguing that joining the euro would provide much needed stability for manufacturing industry.

Test of competence

After four years in office, Labour will claim credit for some impressive headline figures - far different from the record of some previous Labour governments.

Unemployment has fallen below one million for the first time in 25 years, inflation has been below the government's 2.5% target for two years, and interest rates are set to fall further from their current level of 5.25%.

The latest figures show that the numbers claiming unemployment benefit continued to fall to 975,000 in April, while inflation remained steady at 2%.

All this is a result of steady economic growth, which has also boosted the government's tax receipts, leading to a large budget surplus for the Chancellor.

Much of the credit for the management of the economy must go to the Bank of England, which has been given independence to set interest rates as it sees fit - a change now supported by all the main political parties.

Interest rates have now been cut three times this year, and many economists believe more reductions are on the way.

The Conservatives can rightly point out that the economic recovery began during their years in power, with the economy growing by about the same rate between 1992 and 1997 as during the last four years.

However, polls suggest Labour is holding its lead as the most competent party to manage the economy.

The first News Online 1000 poll showed that 44% believed Labour was the most trusted party to manage the economy, compared to 32% for the Conservatives and 6% for the Liberal Democrats.

The rest (18%) didn't know or chose other parties.

The poll was conducted among 1,033 adults, 270 of them contacted by telephone and the rest by email, between 24 April and 1 May by ICM in Great Britain.

Future fears

Looking to the future, there are dangers ahead for the economy - which is one reason the Bank of England is cutting interest rates.

Business confidence in Britain is falling, and output in the manufacturing sector is contracting.

The Bank of England has warned in its quarterly inflation outlook that "the fall in equities and moderating income growth suggest that UK spending will ease over the course of this year."

The world economy is slowing down, most notably in the United States, where growth has fallen sharply from 5% last year to less than 2% this year.

That has reduced growth prospects around the world, and most forecasters - including the IMF and the OECD - expect the UK economy to slow from last year's growth rate of 3% to below 2.5% this year.

However, in the first three months of the year, the UK economy only grew by 0.3% - an annual rate less than half of that projection.

The Conservative leader, William Hague, has warned that the effects of foot-and-mouth disease, the slowdown in Europe and the US, and further falls in stock prices could derail the economy.

And he argues that high and rising levels of taxation will make the UK economy more vulnerable to any slowdown - a claim Labour strongly refutes.

Manufacturing vulnerable

The manufacturing sector of the economy is the most exposed to the effects of an international slowdown, and has already been suffering from the effects of the high pound which makes UK exports more expensive.

Already there have been big job cuts announced in the car industry (Ford and Vauxhall), the steel industry (Corus), and the electronics sector (Motorola), and these could accelerate if the world slowdown gathers pace.

The Lib Dems argue that joining up to the euro, the single currency used in 12 EU countries, would eliminate the problem of a fluctuating exchange rate for the majority of UK exports - although they acknowledge that the UK would have to join at a lower exchange rate than at present.

The Conservatives argue that joining the eurozone would mean that UK interest rates would be set in Frankfurt by the European Central Bank, at levels that might be wrong for Britain.

Labour, which will take a decision on whether joining the euro will be of economic benefit to Britain after the election, has announced a series of measures to help re-train workers displaced by manufacturing layoffs.

The problems in the manufacturing sector are leading to a growing trade deficit, which could ultimately cause sterling to drop in value.

One worry for the government and the Bank of England is a sharp fall in the value of the pound, which could boost inflation and hit confidence in the UK economy.

Effect on the election

It is unclear how much of an influence the state of the economy will have on voters in this election.

Overall, most households have benefited from rising real incomes and falling unemployment, with average real income per head up 10% under Labour.

It has been argued that if voters feel affluent they are likely to back the party in power.

However, the reasonably sound economic situation in 1997 did not seem to benefit the Conservatives.

Instead, many voters appeared to blame the Tories for the 1992 sterling crisis when the pound was forced out of the exchange rate mechanism.

In this general election, although the state of the economy may not win the election for Labour, it looks unlikely to lose it for them.



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