I’ve heard the phrase “it was Labour’s financial crisis” too many times over the last couple of years. I’ve had plenty of lively conversations with Labour activists - this blog results from those and particularly those with a student friend Gillespie Guereca Adair, co-author.
Through this process, our ideas got sharpened up with more evidence and research, which is the basis for this blog. This is our joint work, our own opinions and choice of evidence, about the myths which are gaining unfortunate credence about the economy and the causes of where we are now economically.
First, myths to correct:
- It’s all Labour’s fault – Gordon Brown mismanaged our economy as the Chancellor and then as Prime Minister. Nope, it was a GLOBAL FINANCIAL CRISIS CAUSED BY PRIVATE DEBT, NOT PUBLIC SPENDING.
- The Tories are always having to clean up Labour’s mess – Monetarist policies reduce deficits and boost the economy. AGAIN, NOPE, TORIES RUN DEFICIT GOVERNMENTS AS ROUTINE – SEE BAR CHART BELOW.
- Cutting the deficit is the most urgent priority and will result in economic growth. AND AGAIN, NOPE, HISTORY HAS TENDED TO SHOW THAT CUTTING PUBLIC SPENDING TENDS TO HAVE THE OPPOSITE EFFECT OR ONLY VERY LIMITED, PARTIAL GROWTH.
It was a global financial crisis
Initially the housing bubble in the USA and the banks funding this were falling giving out bad debts, which meant that they weren’t going to be repayed. This caused a mass drop in the confidence levels, which expanded across the world, leading to banks globally to call in those unpayable bad debts, resulting in what we know as the credit crunch. Some people may say that this was a tradition started, nay positively encouraged by right wing governments on both sides of the Atlantic – yes it was. Unfortunately, by the time Labour got into power in 1997, there was a global neo-liberal dogma about banking regulation, very hard to challenge, which meant that all parties were calling for yet more de-regulation.
It wasn’t all bad – some of this helped to create the economic conditions referred to asNICE – Non Inflationary Constant Expansion, which Mervyn King called the period from 1997 – 2007. Deregulated global financial markets can and do achieve economic growth in the short term. However, a deregulated banking sector inevitably ends up meaning that poorer households and businesses accumulate unsustainable debts they can’t support or pay back.
Of course they do – if there aren’t any strict rules or no enforcement of the ones we have, banks can and do and will just go for the quick return, lending money to someone who is having to borrow on their credit card to pay for their deposit on their house. Some policy makers wring their hands and say that because the global markets are so open that you can’t unilaterally start regulating, or the banks would just move to another country (or so we are always being told).
The Tories ran deficit budgets for years – and had more than a smattering of recession
The Tories seem content to peddle a myth which Labour isn’t challenging nearly hard enough, that it’s Labour = recession/deficit and Conservative = balanced budget. Why aren’t we mentioning the recessions of the early eighties and the early nineties?
As you can see from the graph above, most of the Tory governments spent most of their years in deficit, which Labour then turned to surplus. Yes, the graphic above cut off the part where Labour was in charge and there was a deficit – 2007-9, but we have already outlined the reasons for that above. But we need to challenge the lie that Tories don’t run deficits. They do.
There was, in fact, universal agreement on Labour’s management of the economy during the NICE years. The current Chancellor, George Osborne, was not only quoted as saying that the Tories would match Labour’s spending “pound for pound”,but calling for an even greater deregulation of the banking sector, accusing Labour of being “too tough“! Let’s be clear – deregulated banking caused the problem, the Tories want more of it.
Is slashing public spending right here right now our most urgent priority? Will it promote growth and cut the deficit?
Last Autumn, when reporting on child poverty, the OECD identified that under Labour, the UK became one of the biggest investors in families in the OECD members but that the impact of recent cuts was likely to reverse this: “cutting back on early years services will make it difficult for the UK to achieve its policy of making work pay for all”. The IFS reported that last Autumn that: “Low-income households of working age lose the most from the June 2010 Budget reforms because of the cuts to welfare spending. Those who lose the least are households of working age without children in the upper half of the income distribution. This is because they do not lose out from cuts in welfare spending and are the biggest beneficiaries from the increase in the income tax personal allowance”. This week, the Financial Times reports that “household spending accounts for nearly two-thirds of the economy so it is hard for consumers to be severely squeezed and for the economy to grow”. And the OECD doesn’t think it’s going well either.
So cuts to family income isn’t just bad for children, it’s bad for growth. Even today, the OECD reports that growth forecasts were optimistic and that we are possibly approaching stagflation. We would argue that we are already there – inflation is above target at 4.5% and unemployment is just below 2.5 million, with unemployment rates for young people and for women rising.
Currently the Tory-led government has a policy of cutting public services, cutting welfare spending and removing support that keeps people in employment and economically viable. This deadly combination is not only hurting the most vulnerable, it is actually making it harder for us to achieve stable growth.
Gordon Brown actually saved us from ruin – we should be prouder of him
The recession was caused by many things and a large contributor to the increased deficit was the dramatic decrease in tax returns, due to people losing their jobs and a cut in VAT, because of the global financial crisis and the consequent run on banks unable to support their own debts. Gordon Brown’s strategy – partial nationalisation of banks, providing state guarantees for loans between banks and quantitative easing (putting cash into the economy) – is probably what saved us from ruin in 2008. Again, don’t just believe us, Sir James Wolfensohn, former president of the World Bank says so, and that Gordon Brown “has proved that he has the leadership skills, the vision and the determination to bring the world together”. Robert Skidelsky, a leading economic historian and cross-bench (though right wing) peer, this week accused coalition ministers of “a woeful example of putting domestic politics ahead of the world good” and being “small minded and petty” because Brown is “the best qualified” to be the new head of the International Monetary Fund.