Is Labour really to blame for the deficit?


9:15 am - August 12th 2010

by Adam Lent    


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So common has it become for the White House to blame all bad news on the last administration that a Washington joke claims that Obama is planning to name a newly discovered trench deep under the US, “Bush’s Fault”.

Much more of this sort of stuff from the Coalition and maybe we’ll soon see Gordon’s Fault opening up somewhere under Whitehall.

One of the recurrent claims of the Government, repeated to much fanfare yesterday, is that Labour got us in to our fiscal mess by spending too much.

In particular, it is often claimed that if Brown had paid down debt and built a surplus before the Crash, we would not be in the position we are now.

It is interesting, therefore, to look at the pre-Crash fiscal condition of some countries now with high deficits to see if this is borne out.

According to the OECD (PDF), seven of its member countries exceeded the OECD average deficit of -7.9% by the end of 2009. The table below shows what their deficit as a percentage of GDP was in 2007 compared to 2009:

2007 2009
Ireland 0.1 -14.3
Greece -5.4 -13.5
UK -2.7 -11.3
Spain 1.9 -11.2
USA -2.8 -11.0
Portugal -2.7 -9.4
Iceland 5.4 -9.1

So, in fact, three of the countries now in the direst state had surpluses before the Crash and four were in deficit. Indeed, Iceland had one of the healthiest fiscal positions of all OECD nations in 2007.

The one thing these countries do seem to share is not a bad deficit position prior to the 2008 meltdown but economies heavily reliant on banking and/or construction – the sectors probably hardest hit by the Crash and recession.

There must be a lesson there but I’m not sure it’s the one this Government has drawn from the experience of the last three years.

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About the author
Adam is an occasional contributor, former Head of Economics TUC, Associate Fellow at IPPR and co-author of 'In The Black Labour'.
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Reader comments


It is standard politics for all governments to always blame the previous administration for its problems.

I recall hearing Labour ministers blaming the previous Conservative administration well into their second term in government.

If it was acceptable for Labour to be blaming the Tories following 6+ years of Labour government, why is it wrong for the Tories/Obama to be blaming their predecessors after a comparatively short period of time in power?

“Is Labour really to blame for the deficit?

Yes, next.

Cable warned Brown about high lvels of personal, corporate and national debt in November 2003 and was ignored.

Oh dear
This will be a right wing troll fest by judging the two comments above.
Like right wing fly paper.

The level of spending under Brown and Blair was actually lower as a percentage of GDP than under Thatcher and Major. Most of the deficit was run up bailing out the banks, which happened due to policies which were *too* business friendly – i.e. torie policies adopted by New Labour.

Anyone who thinks the tories would have done anything other than follow exactly the same extreme pro-business model, and faced the same subsequent crash, is a deluded fantasist.

6. Luis Enrique

To what extent does the government get to chose its country’s industrial mix? In which case the question becomes, was Labour to blame for the deficit, just thinking about the things that were realistically within its power to change. If you think that having too much banking was to blame, I’m not sure that exonerates Labour, who still might have been less in thrall to the bankers.

The best article on this question is: The Economic Legacy of Mr Brown

So, in fact, three of the countries now in the direst state had surpluses before the Crash and four were in deficit.

Genuine question here – how many of these countries ran budget deficits every year since 2002? I think it’s just two, the UK and the US, but I suppose Greece might have done as well.

Most of the deficit was run up bailing out the banks…

Wrongo! The cost of the bailout is specifically excluded froom deficit calculations.

“The cost of the bailout is specifically excluded froom deficit calculations”

The cost of the actual bailout, but not the large stimulus package, which, I think you will agree, is not unrelated to the banks failing – the bank failing which would have still happened under the tories. As I said, spending was actually higher as a percentage of GDP under Thatcher and Major than under Brown and Blair. This only became an issue for Brown because the economy tanked – caused by pro-city tory policies adopted by New Labour.

It’s very clever of the tories to make out this is all the fault of Labour policies, when in reality it’s due to Labour waering tory clothes for 13 years.

The cost of the actual bailout, but not the large stimulus package…

What large stimulus package? The total fiscal stimulus came to about £20bn – possibly less as a lot of measures were announced but not implemented. The overwhelming mass of the stimulus was monetary. The reason the deficit expanded so dramatically was the traditional one of revenues falling and benefit payments increasing. That’s not a stimulus, it’s a stabiliser.

And none of it explains why Labour ran deficits in 2002, 2003, 2004, 2005, 2006 and 2007.

11. Luis Enrique

Does anybody know what the latest estimate for the “cost of the bailout” is? I have seen a number of piecemeal reports saying that many elements of the bailout are now showing a profit (i.e. a negative cost – a recent example) but I don’t know where to go for an estimate of the overall net direct cost.

“The reason the deficit expanded so dramatically was the traditional one of revenues falling and benefit payments increasing.”

Yes, caused by the crash; the crash resulting from over-reliance on the city – an over-reliance those on the right were even keener on than New Labour.

12 – which explains the deficits in 2002,3,4,5,6 and 7 how?

Tim J: “And none of it explains why Labour ran deficits in 2002, 2003, 2004, 2005, 2006 and 2007.”

But, looking at the pre-crash deficit and the post-crash deficit, it’s quite clear they would have had to be running a really quite massive surplus to have avoided having an enormous deficit afterwards – something I don’t think the Tories would have tolerated in opposition. If Labour had insisted on running a surplus on that scale, I can guarantee they would have been screaming blue murder about the greedy state unnecessarily hoarding money when they could be cutting taxes on wealth creators.

Alternatively, of course, they could have regulated the financial and real estate sectors more closely, which would have meant lower short term growth (and anguished screams about evil anti-business socialists from the financial sector, Tories and the press) but would have considerably reduced the risk of economic bubbles. But they didn’t. My guess is that despite their posturing and rhetoric in opposition they still wouldn’t.

10: Just a quick check, was Cameron wrong to promise to match Labour’s tax and spending plans until he changed his mind in Nov 2008?

@15 – yes, he was wrong. Very wrong.
Of course Labour had it been elected would have changed its plans, indeed did change its plans as we saw in Darling’s final budget.

(Though Cable and Redwood were both warning early on about certain aspects of the credit bubble.)

This report makes pretty clear:

http://www.ifs.org.uk/bns/bn93.pdf

That the UK’s public fianances were in relatively good shape until 2007 (Althought they weren’t in as good a shape as some countries, but David Cameron pledged to match Labour’s spending plans when he became Conservative party leader in 2005 so he has little credibillity when he attacks Labour’s record on public finances.)

In fact the vast majority of the debt was run up since then on the government bailing out banks and the stimulus package. Without which we would not now be in a recession, we would now be in the middle of a 1930s style depression (and if the coalition has it’s way that will be where we are heading)

It amazes me the levels of economic illiteracy amongst those who criticise the last Labour government.

Tim J – “And none of it explains why Labour ran deficits in 2002, 2003, 2004, 2005, 2006 and 2007.”

Basically, because the government thought that balancing the budget was not as high a priority as dealing with the health service, education and various other commitments.

It should be pointed out that Labour’s did have plans to balance the budget with tight spendign restrictions from 2007-2010, but other things got in the way. It should be also be pointed out that when it comes to balancing the budget, governments of both stripes have poor records. Labour’s surplus from 1998-2001 was the longest continuous surplus of any post-war government.

@Tim J

Do you – or does anyone you know – have a mortgage? I’m gonna assume “yes” – what profligacy! What decadence! How irresponsible living in debt for so many years!
—————————————————-
Maybe, just maybe, if your lovely Tories hadn’t left Britain’s services (NHS, education, police, communities etc.) in such an abysmal state wayyy back in ’97 Labour wouldn’t have had to spend so much to get us up to civilised standards. Just a thought.

“In particular, it is often claimed that if Brown had paid down debt and built a surplus before the Crash, we would not be in the position we are now.”

Yes, correct, standard Keynes, you should have fiscal contraction in a boom.

But quite why you then go on to witter about deficits I’m not sure. The point is about the national debt, not the deficit an any one year or series of years.

If Brown had, as Keynes would have advised, run a budget surplus during the longest boom in modern British history, then the national debt would be much lower than it now is.

This would have enabled more borrowing now: we would not be facing the (argued about, I know) constraint upon our borrowing ability and thus would not actually be facing the current dilemma, of how to cut, how to have fiscal contraction, in the midst of a recession.

You’re looking at absolutely and exactly the wrong point. If Brown had run budget supluses and paid down the debt then we wouldn’t now, have to cut expenditure.

You, who are arguing against there needing to be any cuts at all, should therefore be arguing that Brown should have been running surpluses so that fiscal expansion now was possible.

It’s interesting that in 2007 David Cameron pledged to match Labour’s spending plans.

http://www.telegraph.co.uk/news/uknews/1562023/Tories-vow-to-match-Labour-spending.html

So when he now criticises the last Labour government’s handling of public finances, he doesn’t really have much credibillity now does he?

Funny how he and all the Tories and their friends seems to have forgotten all about this, isn’t it!

@21

They have a ready-made answer to that criticism: “It was worse than we thought when we got into power..!” – the same bollox that the LibDems use to justify their U-turn on VAT.

It’s very clever of the tories to make out this is all the fault of Labour policies, when in reality it’s due to Labour waering tory clothes for 13 years.

Exactly. Did the Tories predict the financial crisis? No.

Would they have bailed out the banks? Yes.

Would they not have used money to stimulate the economy? Possibly, but they know now that money helped us come out of the recession very quickly despite the deep, deep slide.

Do Tories have the economic nuance to preach to anyone? No.

They are to blame for some of it but nowhere near as much as some claim. The deficit is just a ratio and if the denominator falls the numerator will increase. Even if they had run a balanced budget or a surplus during the noughties we would still have a large deficit now.

If the deficit is below the level of growth then the the ratio falls even though the total stock is increasing. What matters is whether what government extracts from the economy is balanced. It certainly was not very balanced when five banks were providing 25% of the corporation tax extracted from the whole economy If the banking sector are making large profits and the corporate profit level is constant and the labour share of national income is falling. Sounds like a description of the British economy since the last recession. Corporate and household debt must be rising. Leverage must have some limitations for the private sector but where that is is the subject of much debate. The private sector collectively acted in 2008 as if that limit had been reached. Whether that was rational or not who knows but interest payments as a proportion of income were not historically high.

If they had run a primary account surplus they would have had to cut taxes or redeem some national debt. The pension funds and insurance companies were totally against them reducing debt. They wanted them to increase it by running a deficit. Mature pension funds need fixed income securities to match assets with liabilities. Even if they had held down spending and cut taxes we would still have a deficit.

Apart from hubris their big fault was not doing much to balance the economy. However, unbalance did not start in 1997. If the Tories had been in power and we assume they would have done all they claimed they would do during that period. We would still have a deficit but not as large. To say it is all the fault of Labour is nonsense.

“The pension funds and insurance companies were totally against them reducing debt.”

Not quite. After the pension funds were told they had to buy a certain amount of Treasury debt, reducing their holdings of long term coproate bonds, then they didn’t want the stock of Treasury debt to shrink……

Do you – or does anyone you know – have a mortgage? I’m gonna assume “yes” – what profligacy! What decadence! How irresponsible living in debt for so many years!

Moron. I have a mortgage, but make sure that my outgoings do not exceed my income. Deficit =/= debt.

27. Peter Cole

Tim J
I bet you are in debt.
Your sort always are ?
But Mummy and Daddy will bail you out

Peter,

You either know Tim outside of the blogosphere or are guessing about him. And what sort ‘is always in debt’ anyway? Students perhaps?

29. Chris Whitrow

I blame the last Labour government for many things, but the deficit is clearly not one of them. There is a small structural component to it, but the vast majority is due to the £800 billion we had to spend to bail out the banks, because they had created a huge private sector debt bubble which then burst. So, effectively, the government had to transfer a lot of that private debt to the public sector, because the whole private sector financial system was about to collapse.

In fact no single government, let alone Gordon Brown’s, can be blamed for this worldwide failure of global capitalism, which has left every major economy with a massive deficit. The tragic irony is that the Coalition is now trying to pretend it wasn’t the fault of the bankers after all. According to them, it must be the fault of public sector workers or the unemployed, leeching off hard-working tax-payers. These are the people (including the hard-working tax-payers) who are now being asked to pay for the £800 billion we spent on nationalising the banks in order to save them from their own folly. Even Richard Littlejohn really couldn’t make it up.

Another thing that few people realise is that the private sector remains even more indebted than the public sector, although we don’t see much hand-wringing over that, despite the fact that it is the main impediment to economic recovery.

.

30. George Kendall

In April, Andrew Dilnot, formerly in charge of the IFS, was interviewed by the BBC on exactly this issue. In his mild-mannered way, he made clear that he blamed Labour for most of it.

He can listen to the interview at:
http://www.bbc.co.uk/iplayer/console/b00rpvs2
It’s about five minutes into the programme.

Below is a rough transcript.

He say that in the last 7 or 8 years we’ve seen a consistent increase in public spending without a corresponding increase in tax.
He says he doesn’t regard bank bailout as significant, as it involved acquiring assets. Ballooning of borrowing during recession not important, as that borrowing will tend to go away. “The real problem that we face now is that at the end of the longest consistent period of economic growth that we had ever seen … 16 years … the government was spending 4.5% of national income more than it was raising in taxes.”

@29. Chris Whitrow

Thank you that is probably the most intelligent comment I have seen so far on this thread.

The only problem is it is not accurate, Graham. The 800 billion that Chris quotes are government guarantees not money spent. The government guarantees 50,000 in personal bank accounts in the UK. That is not money they spend but just a guarantee that they will spend it if necessary. Think of an insurance company insuring your house for 500,000. They do not spend 500,000 but merely assume the liability. The assets that the government acquired bailing out various banks adds to the national debt but does not add to the deficit other than the marginal interest costs.

It is true to say that the severity of the banking crisis has forced a deficit on the government. However, those who say the baking crisis caused the recession need to answer this point. The banking crisis requiring bail outs was September and October in 2008. The recession in the UK started in the spring of 2008. It was major policy failures by the Fed, ECB and BoE lasting from the autumn of 2007 until the end of 2008 that caused the recession. The policy failures causing the recession led to the banking crisis, which exacerbated the recession.

33. Chris Whitrow

@Richard W:

The cost of purchasing shares in Lloyds and RBS was not £800 billion, of course. It was £76 billion. Add to that £40 billion in loans to Bradford and Bigley and the Financial Services Compensation Scheme. That’s about £116 billion in terms of additional immediate expenditure, according to the National Audit Office. This is about 7.7% of UK GDP of around £1500 billion. So, about 68% of the total deficit can be attributed directly to actual spending on bank support; that is the vast majority of the deficit.

Much of the rest is attributable to the cyclical effect of a recession which was caused by a private sector debt bubble which started bursting long before Spring 2008 (sub-prime mortgage lender New Century Financial filed for Chapter 11 bankruptcy in April 2007). Let’s be absolutely clear: It was the financial services sector which led the world into recession and which is almost entirely responsible for the huge deficits seen in all the major economies.

@Richard W

However, those who say the baking crisis caused the recession need to answer this point. The banking crisis requiring bail outs was September and October in 2008. The recession in the UK started in the spring of 2008. It was major policy failures by the Fed, ECB and BoE lasting from the autumn of 2007 until the end of 2008 that caused the recession. The policy failures causing the recession led to the banking crisis, which exacerbated the recession.

Really? So did the Fed, ECB and BoE force the banks in America to lend sub-prime mortgages to anyone with a pulse regardless of whether or not they had an income and then package those worthless mortgages into derivatives which were then spread throughout the global financial system, setting a financial timebomb which went off in late 2008?

A real victory for deregulated markets that one.

33. Chris Whitrow

@Richard W:

‘ The cost of purchasing shares in Lloyds and RBS was not £800 billion, of course. It was £76 billion. Add to that £40 billion in loans to Bradford and Bigley and the Financial Services Compensation Scheme. That’s about £116 billion in terms of additional immediate expenditure, according to the National Audit Office. This is about 7.7% of UK GDP of around £1500 billion. So, about 68% of the total deficit can be attributed directly to actual spending on bank support; that is the vast majority of the deficit.’

One-off purchases of bank equity have nothing to do with the fiscal deficit. They are not spending the same money every year as it is one-off spending.

‘ Much of the rest is attributable to the cyclical effect of a recession which was caused by a private sector debt bubble which started bursting long before Spring 2008 (sub-prime mortgage lender New Century Financial filed for Chapter 11 bankruptcy in April 2007). Let’s be absolutely clear: It was the financial services sector which led the world into recession and which is almost entirely responsible for the huge deficits seen in all the major economies. ‘

34. Graham

@Richard W

‘ Really? So did the Fed, ECB and BoE force the banks in America to lend sub-prime mortgages to anyone with a pulse regardless of whether or not they had an income and then package those worthless mortgages into derivatives which were then spread throughout the global financial system, setting a financial timebomb which went off in late 2008?

A real victory for deregulated markets that one.’

Look I am not saying that there were not serious problems in the banking sector on both sides of the Atlantic. Moreover, Graham is right to say that deregulation had a large part to play in it. What I am saying is the Fed, ECB and BoE allowed through their policy failure a containable problem that would have led to a mild recession to escalate out of control to such an extent that the whole system nearly collapsed. The remarkable thing is apart from Bernanke none of them get much media criticism. In fact, King is being given more powers. The media prefer to focus on pantomime villains like Goodwin because it is easier to understand.

They allowed a precipitious fall in the money supply throughout 2008. Tim Congdon on the right and Danny Blanchflower on the left were screaming throughout 2008 that money was too tight. It was tight money that led to a fall in growth and an even worse fall in growth expectations. That fed into falling asset prices and turned problems in the banking sector into a crisis. They totally misread the problems in the repo market between banks and allowed it to transfer from the repo market to the real economy. Real interest rates were rising and they were totally oblivious to it. Here is a Scott Sumner post arguing the same thing.
http://www.themoneyillusion.com/?m=201008&paged=2

Tight money leads to charts like this and that in turn leads to recession and unemployment.
http://2.bp.blogspot.com/_tvshDVnXSLc/TFiPS5V4dPI/AAAAAAAADLM/jrCVptiAgzs/s1600/UK+lending.jpg

http://1.bp.blogspot.com/_tvshDVnXSLc/TGKrSsXypXI/AAAAAAAADXM/ZyXQhkZFZao/s1600/USA+bear+bul+p-e.png

36. Charlieman

@20 Tim Worstall: “If Brown had, as Keynes would have advised, run a budget surplus during the longest boom in modern British history, then the national debt would be much lower than it now is.”

Alas, I can’t find the direct quote from Margaret Thatcher comparing the national economy to a household budget. For a second hand description, the best I have found is “a woman’s ability to run a household was, she claimed, an important skill in running the country”.

It is a very crude analogy, and one which is false. There may be times when your household is indebted when it is correct to take on more debt.

But I cannot prevent myself from comparing Gordon Brown to the millions of householders who borrowed money in the expectation that increasing house prices would cover personal debt.

37. George Kendall

@Charlieman “I cannot prevent myself from comparing Gordon Brown to the millions of householders who borrowed money in the expectation that increasing house prices would cover personal debt”

I think that’s a pretty good analogy.

Gordon Brown was running large deficit budgets in a boom, from 2003 to 2009, of up to roughly £40 bn. But, because the economy was growing, the debt, as a proportion to GDP, wasn’t going up.

But the real problem was that this deficit would have been far higher, were it not for temporary tax revenues from a bubble that has since burst. So, effectively, there was a far larger deficit lurking beneath the surface.

It’s not the bailout that matters. Nor the £156 bn deficit itself, because some of that will go away as the economy recovers. It’s the £100 bn of structural deficit.

To be fair to Gordon Brown, only a few commentators were warning that he was relying on temporary revenues from a bubble. But he was warned about the £40 bn deficit. And if he had raised taxes sufficiently to cover that deficit, the structural deficit we’re facing now would only be two thirds of the size.

38. Chris Whitrow

@Richard W: As far as the facts and figures are concerned, we agree for the most part. Bank support should not be counted as part of the deficit, but the Coalition government thinks differently: that £116 billion is included in the budget deficit for 2009.

The sensible response to this crisis would be to add the costs of bank support to the national debt, tackle the structural part of the deficit gradually, then wait for the return of economic growth before paying down the debt. But that’s not what the government is doing. They peddle the myth that it’s all down to unfunded public spending by Gordon, but this component of the deficit is dwarfed by bank support and cyclical factors (i.e. depressed tax revenue and increased welfare payments).

Even if we didn’t cut public spending at all, the deficit would shrink considerably as growth returns and banks no longer need support. The calls for 25% spending cuts are entirely driven by political ideology and have nothing to do with economic reality.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    Is Labour really to blame for the deficit? http://bit.ly/a2SooK

  2. Other TaxPayers Alli

    …and now at @libcon too – worth reading. Is Labour really to blame for the deficit? http://bit.ly/a2SooK

  3. Benjamin

    RT @libcon: Is Labour really to blame for the deficit? http://bit.ly/a2SooK

  4. Laura

    RT @OtherTPA: …and now at @libcon too – worth reading. Is Labour really to blame for the deficit? http://bit.ly/a2SooK

  5. Martin Shovel

    RT @libcon: Is Labour really to blame for the deficit? http://bit.ly/a2SooK

  6. David_MacNeil

    RT @libcon: Is Labour really to blame for the deficit? http://bit.ly/a2SooK

  7. A and B Mundy-Castle

    RT @libcon: Is Labour really to blame for the deficit? http://bit.ly/a2SooK

  8. Andy Sutherland

    RT @OtherTPA: …and now at @libcon too – worth reading. Is Labour really to blame for the deficit? http://bit.ly/a2SooK

  9. Nick Winstone Cooper

    Something the Tory government should read before they blame the last government for everything http://tinyurl.com/24eqkae

  10. Steve Rudland

    RT @libcon: Is Labour really to blame for the deficit? http://bit.ly/a2SooK

  11. Derek Bryant

    RT @libcon: Is Labour really to blame for the deficit? http://bit.ly/a2SooK

  12. Tom Harris

    RT @libcon Is Labour really to blame for the deficit? http://bit.ly/9r7Ioa

  13. Obnoxio The Clown

    RT @TomHarrisMP: RT @libcon Is Labour really to blame for the deficit? http://bit.ly/9r7Ioa <– questions to which the answer is "yes"

  14. Martin Coxall

    RT @obotheclown: RT @TomHarrisMP: RT @libcon Is Labour really to blame for the deficit? http://bit.ly/9r7Ioa <– questions to which t …

  15. Andrea Gill

    RT @obotheclown: RT @TomHarrisMP: RT @libcon Is Labour really to blame for the deficit? http://bit.ly/9r7Ioa <– questions to which t …

  16. Jon Pearson

    RT @obotheclown: RT @TomHarrisMP: RT @libcon Is Labour really to blame for the deficit? http://bit.ly/9r7Ioa <– questions to which t …

  17. Stuart Whittingham

    RT @TomHarrisMP: RT @libcon Is Labour really to blame for the deficit? http://bit.ly/9r7Ioa

  18. Jessica Rabbit

    RT @obotheclown: RT @TomHarrisMP: RT @libcon Is Labour really to blame for the deficit? http://bit.ly/9r7Ioa <– questions to which t …

  19. Steve Tierney

    RT @obotheclown: RT @TomHarrisMP: RT @libcon Is Labour really to blame for the deficit? http://bit.ly/9r7Ioa <– questions to which t …

  20. Stuart Bonar

    RT @obotheclown: RT @TomHarrisMP: RT @libcon Is Labour really to blame for the deficit? http://bit.ly/9r7Ioa <– questions to which t …

  21. Will MBA or a certification course help me to get into Finance industry? | The Worlds Finance Reviews

    […] Is Labour really to blame for the deficit? | Liberal Conspiracy […]

  22. steveakehurst

    @ArnieEtc See: http://t.co/Kwo1TUph

  23. Steve Akehurst

    @DAngland ..link through all countries with big deficits is over-exposure to financial services, not overspending. See: http://t.co/Kwo1TUph

  24. Steve Akehurst

    @liberal_neil Gah – last time. Deficit was tiny & basically irrelevant, it didnt 'shoot up' in ‘03. Pls least read http://t.co/Kwo1TUph

  25. Owen Blacker

    @binny_uk @paulbernaluk Irrelevant http://t.co/11gDYbVx





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