Labour may be improving in the polls under Andy Burnham, but overall support for the party is still very low. Economic confidence tells a similar story, says Paul Ormerod

Both in the opinion polls and in local authority by-elections, there is clear evidence of a “Burnham bounce” for Labour. But in historical terms, support for the party is still very low. It is simply that it is better than it was under Starmer.

Economic confidence tells a similar story. Last month, GfK’s Consumer Confidence Index rose to a two-year high. But the balance is still firmly in the red, standing at -14 points. Many households remain more pessimistic than they are optimistic.

The same is true of the corporate sector. The CBI’s industrial trends survey in August showed a quite distinct improvement on the previous month. But more manufacturers thought that output would decrease over the next three months than thought it would increase, the balance being -7 points.

Two months ago, I wrote that the financial balance sheet of the private sector was in much better shape than it has been for 25 years. 

Both companies and households have been repaying debt. So they are in a position, if they had sufficient confidence about the future, to spend. There are signs that this is now happening.

But private sector confidence in the economy is still fragile. During lockdown, for example, the Office for National Statistics (ONS) estimated that households accumulated a massive £180bn of so-called “excess savings”.  Conventional wisdom argued that once the restrictions were lifted, people would spend and run these down.

On the contrary, households have been saving more than they did before the pandemic, not less. In the three years leading up to the Covid crisis, for example, households saved 5.6 per cent of their disposable incomes. In the most recent three years, the figure is 8.8 per cent. The difference may seem small, but in cash terms it amounts to some £60bn a year.

Uncertainty premium

What the private sector, whether households or companies, needs above all else is confidence. Their balance sheets are healthier, but they are still hesitant to spend.

In the 1930s, John Maynard Keynes identified confidence as the key factor which drove the economy. True, he advocated public spending to boost the economy, but he did not imagine in any way that there was an automatic connection between this and higher levels of economic activity.

In a short but crucial passage of his major work, the he argued that the positive boost would be undermined if the increase in public borrowing which it entailed had an adverse effect on “confidence”. 

Since the pandemic there has obviously been a high level of uncertainty about the overall economic and political environment. The combination of the energy price shock when the conflict between Russia and the Ukraine began, reinforced by the war against Iran have not exactly created benign conditions.

There is little, if anything, that a British government can do to influence these events. But what it can do is to try and reduce the level of uncertainty created by purely domestic events.

The Chancellor, John Healey, has certainly helped in this respect. He has not permitted the apparently endless stream of leaks and subsequent denials over tax, for example, which characterised the tenure of his predecessor, Rachel Reeves. It was a massive display of incompetence by Reeves which simply created uncertainty and undermined confidence.

His commitment early this week to fiscal discipline carries more credibility than did Reeves. Under Starmer and Reeves, public spending plans were increased by over £100bn, which rather vitiated their insistence that their government was fiscally responsible.

The huge level of outstanding public sector debt carries the ever-present threat that taxes will have to be raised to meet the interest and repayment schedules. Despite the recent rosy signs, it will continue to act as a depressant on confidence.

Paul Ormerod is an Honorary Professor at the Alliance Business School at the University of Manchester. You can follow him on Instagram @profpaulormerod