Excellent.

Please now see this Dillow piece: SHRINK THE STATE: A LEFTIST AIM

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2009/04/shrink-the-state-a-leftist-aim.html

Of course, you might argue that it was wrong to increase spending rather than to cut taxes.

The understatement of the year, expressed almost as a parenthetical aside.

Sorry – thats total nonsense. You make one huge but massively important error – ignoring consumer credit.

GDP growth was driven to a large extent by increasing consumer spending (and credit extension). Whilst your chart above might be true in the case of corporate vs government fiscal balances, once you factor in consumer spending the total money supply was increasing.

As such, massive credit creation was driving corporate fiscal balances and there was no weakness in demand (as can be easily shown – source, bloomberg).

Labour were running an increasing deficit at a time of increasing growth AND increasing taxes and tax revenues, creating a structural deficit. Consumption/credit fuelled GDP enabled this without causing a panic as the deficit defined in GDP terms was only increasing slowly thanks to GDP growth.

That strategy fell apart with Brown’s “no return to boom and bust” hubris, as any fall in GDP growth exposed the massive structural deficit.

It is *very* obvious that under Labour the overall deficit did increase marginally and the structural part of that exploded. It was a bet that GDP would keep growing forever. Frankly even trying to defend Labour on this point is patently ridiculous – even Tony Blair admitted spending was getting out of control by 2005 in his memoirs.

Another point totally refuting your argument;

Your chart shows that govt + corporate fiscal balances were ALWAYS negative (around 3%, though the scale ont he chart makes this hard to judge).

I.e. government spending was always biased to overcompensating for any effect caused by corporates saving…..so was always running a deficit bigger than any withdrawal of investment by corporates would suggest it needed to offset any fall in demand.

Deficit spending by sovereign governments:

http://bilbo.economicoutlook.net/blog/?p=332

Debt and deficit figures for OECD countries since 1960 can be found here.

Labour were running an increasing deficit at a time of increasing growth AND increasing taxes and tax revenues, creating a structural deficit.

Only after reducing it massively, and having it at a level that was very, very sustainable as a % of GDP.

7 – I thought you were a Keynesian Sunny. Are you instead just in favour of perpetual deficit spending, regardless of the macro-economic picture?

“So, I don’t think Labour can be blamed for running an excessive deficit. Of course, you might argue that it was wrong to increase spending rather than to cut taxes”

I think exactly the opposite. Labour should have put taxes up to fund services properly. Gordon Brown’s most popular Budget was the one where he put up NI to improve the NHS.

@7 Sunny

I know you’ll believe anything Labour will tell you, but running a 2-3% deficit in times of strong growth whilst hiding lots of spending off-balance sheet (PFI) is totally irresponsible.

The problem was the STRUCTURAL deficit which increased massively under Labour, was hidden by the credit fuelled boom and left the country hugely overexposed when that credit growth turned into a credit crunch.

Tim J also makes the point well – are you a true Keynesian or are you a typical socialist – spending other peoples money till it inevitably runs out.

@9 Don

Sorry, correct me if I’m wrong but there were roughly 160 different tax rises under Labour….before you take into account the drift from leaving tax bands unchanged in the face of inflation.

Tax takes massively increased under Labour. They were simply wasteful when it came to spending it. Spending 44-52% of GDP is far too much already.

“Sorry, correct me if I’m wrong but there were roughly 160 different tax rises under Labour….before you take into account the drift from leaving tax bands unchanged in the face of inflation.

Tax takes massively increased under Labour.”

Tax as a percentage of GDP was 36.4% in 2000, 34.8% in 2004 and 35.7% in 2008 (37% in 1985 for comparison). Figures from OECD

Basic rate of income tax fell from 23% in 1997 to 20% now.

I thought you were a Keynesian Sunny. Are you instead just in favour of perpetual deficit spending, regardless of the macro-economic picture?

I’m in favour of re-investing in public services after years, if not decades, or Tory under-investment. But I’m not in favour of a perpetual deficit. That’s not what I argued.

Given that Tories planned to match Labour spending plans until after the financial crash – its time to read up on Politics 101.

12 – So you’re not in favour of perpetual deficits? When should the Governments run surpluses or balanced budgets then? During the longest boom in British history perhaps?

Given that Tories planned to match Labour spending plans until after the financial crash – its time to read up on Politics 101.

Eek, a non-sequitor followed by a crashingly leaden cliche. With a grammatical error thrown in for free! Now that’s what I call writing!

Labour should have cut taxes rather than increasing spending?
Labour cut the base rate from 22p to 20p in 2007.

It could well be argued that this was an extremely poor move in hindsight and it could be a contributary factor to the issues we’re seeing.

I’m certainly with Don in that I feel taxes should have gone up to fund spending, and I am not sure how a future Labour Government can or should rule tax rises out in future – regardless of what the perceived political cost would be.

@ Don

Fail. 157 tax rises I believe, and you counter with 1 cut….which isn’t a real one thanks to the 10% band’s removal and fiscal drag.

Love to see where those OECD figures came from…

http://www.guardian.co.uk/news/datablog/2010/apr/25/tax-receipts-1963

(I hope the Guardian is an OK source for you?)

But of course those figures ARE NOT inflation adjusted…they are just as a % of nominal GDP.

Therefore it’s not difficult to show that take home pay in real terms decreased as the result of both direct and indirect taxation – stealth taxes for a great part of it.

@ Sunny

Ah the old Tory under-investment straw man argument. Never seen that one wheeled out before. Let’s ignore the fact that public sector productivity nose-dived under Labour, and all the other massive spending faux pax, and just ask why that makes it OK to build up a huge structural deficit. Was it perhaps because Brown thought he could banish boom and bust, perhaps?

Hmm…and now the Tories, post crash are engaging in cuts now that the UK isn’t growing. Another straw man. well done. Never seen it written that policies can’t change when the reality does.

Cuts which wouldn’t have had to be anywhere near as severe had Labour not run up total national debt and left us with record peacetime budget deficits…more than 2/3 of which were structural and therefore nothing to do with automatic stabilisers or bailouts…..jsut pure overspend.

Oh I get it…

Red Ed comes out and tries to say that Labour isn’t in any way at fault for the defict and crisis…LC comes out with a couple of pieces to support the party line.

Red Ed mentions something about the Tories changing Labour laws….LC comes out with a peice supporting the party line.

Where’s the piece about banker’s bonuses Sunny? I’m sure it’s on its way. How much do they pay you to spout their propaganda?

Fortunately I think you’ll have a hard, nay, impossible time convincing the general public that the tax rises under Labour and the deficit aren’t Labour’s fault.

“Fail. 157 tax rises I believe, and you counter with 1 cut….which isn’t a real one thanks to the 10% band’s removal and fiscal drag.”

Your own stats show that tax as %age of GDP was the same in 2006-7 as in 2000-1, and lower than at any point under Thatcher.

Do you really think that reducing the basic rate of income tax from 23% to 20% wasn’t a real tax cut?

“Therefore it’s not difficult to show that take home pay in real terms decreased as the result of both direct and indirect taxation – stealth taxes for a great part of it.”

Go on then – what was average take home pay in 1997/8 and how much did it change by under Labour?

@17 Don

Do you understand what inflation adjusting is?

My guess is clearly not…

Do you really think that reducing the basic rate of income tax from 23% to 20% wasn’t a real tax cut?

Um, yes because it was financed by removing the 10p bracket. It was a broadly revenue neutral tax change. What the large print giveth, the small print taketh away, blessed be the name of the Gord.

I’m enjoying the comments… two interesting arguments have gone unanswered:

Left-leaning commenters haven’t responded to tyler’s point about consumer credit.

Right-leaning commenters haven’t responded to Sunny’s point about the Tories not opposing Labour’s spending plans (and I’d add: the Tories simultaneously criticised increased stealth taxes, which presumably they would have cut, thus increasing the deficit).

“Um, yes because it was financed by removing the 10p bracket. It was a broadly revenue neutral tax change. What the large print giveth, the small print taketh away, blessed be the name of the Gord.”

That can’t be right. I am comparing the 23p tax rate in 1997 to the 20p tax rate in 2010. The 10p starting rate didn’t exist in 1997 or in 2010 because it was introduced (and scrapped) under Labour.

You are thinking about the reduction of the 22p tax rate in 2007.

“Do you understand what inflation adjusting is?”

Yes. Do you understand that 23 is more than 20?

21 – Oh, I see. Sorry. The standard argument here is to refer to fiscal drag, and its effect of drawing more people into the income tax base.

The tax take under the last government increased by half of one per cent. The government tax take is a percentage figure of what the government are taking out of the economy. The rate of inflation is irrelevant to the percentage tax take. Chart here from the OBR.
http://4.bp.blogspot.com/_tvshDVnXSLc/TCEv3wUZBDI/AAAAAAAAC8Q/yxIx22x-5io/s1600/balance+budget.jpg

The sectoral balances is obviously a fact of national accounting that when the government have a deficit the private sector will run a financial surplus. However, you left out the other sector of the sectoral balances and that is the external sector. Although, I do not accept that monetary policy was too loose in the lead up to the FC, credit was too loose. The external sector was running a large deficit on the current account. With the government running a deficit and the private sector not investing the deficit in the current account could only come from credit. It was within their powers to dampen down the unsustainable increase in credit. Moreover, why did it not occur to them to put in place policies and incentives to encourage private sector investment? They relied far too heavily on credit financed consumer spending. Some pretty simple measures could have been followed that would have prevented us from being in such a large mess.

It is what they increased spending on that sees us with a large structural deficit. If the government have a surplus and they did until 2001. They can either cut taxes, pay-down debt or increase spending. The national debt was not particularly high so the real choice was to cut taxes or increase spending. If you cut taxes and a recession comes along then taxes can go back up. However, if you increase spending it is vitally important where that increased spending is consumed.

Build new hospitals, social housing, public transport networks and general infrastructure. All that increased spending is one-off spending and will not leave the country with a structural deficit if a severe recession comes along. Increase spending on public services and see it being consumed by higher wages and a structural deficit is certain if a recession occurs. That type of spending is continuous and will still be affecting pension costs 50 years later. Running a deficit for the former spending is also acceptable because there are long-term payoffs. It is like borrowing money to put a new roof on your house is sensible. Borrowing money to go on holiday is dumb. Far too much of the last governments increase in spending went on increases in wages with little obvious benefit. For the government to run a deficit for that was like borrowing for consumption.

@ Don.

23p to 20p was a cut financed by removal of the 10p band, as someone mentions above. Thats the only tax cut example you can come up with? There were 157 individual tax hikes under Labour though, before you count the fiscal drag of tax bands not keeping up with inflation.

Face it, the last Labour government reverted to true tax and spend (and borrow) type, especially under Brown.

@ 20 and 24 Duncan and Richard

Richard does make an attempt to answer the questions is posed in my posts at 3 above…and its not a bad answer (though inflation does matter in the caluclation, as the underlying tax/GDP calc is on a year on year basis, not at constant prices).

No-one has bothered to answer my ponit at 4 though – mostly because they can’t without admitting that the chart effectively shows the government was committed to running an approx 3% deficit regardless of corporate savings.

The comparisons with 1997 and saying “well Labour lowered income tax – tax as % GDP was lower in 2010 than 1997″ etc are all pointless because 1997-2010 was a different time than 1979-1997 (obviously).

You can’t compare Tory policies in the 80s and 90s to Labour’s policies in the 00′s as they were in taken in response and during different background economic conditions.

But still, should Labour have run a deficit during the economic boom? No, of course not and the reason why is being seen now. If Labour hadn’t run a deficit there would be no need for the Tories to come in cutting – so those precious public services would not suffer.

On the other hand, the Tories haven’t a leg to stand on because they would have matched Labour. Basically, both parties are rubbish and the best we can hope for is that the country can pull itself out of this mess in spite of whatever the politicians try.

@26

If Labour hadn’t run a deficit there would be no need for the Tories to come in cutting – so those precious public services would not suffer.

That’s one way of looking at it – another is that the Tories are predisposed to public sector cuts anyway because a significant number of them are ardent advocates of social Darwinism (i.e. assisting the poor through social policy only encourages them, so to remove such assistance would remind them of their proper status), as well as the belief that private enterprise is king. By making the strides in improving public services that they did, Labour were able to make it politically dicey for the Tories to make cuts as swingeing as many of them would have liked.

It worked the other way with the BR privatisation in the mid-90s – Portillo openly admits that it was done in such a way as to discourage renationalisation at a later date.

@ Tyler
“There were 157 individual tax hikes under Labour though”

There are also 215 individual tax reductions (the Daily Mail didn’t mention those?). The number of tax rises or reductions is irrelevent though. It’s the net increase/decrease in tax revenue that is the key.

Mark M”But still, should Labour have run a deficit during the economic boom? No, of course not and the reason why is being seen now. If Labour hadn’t run a deficit there would be no need for the Tories to come in cutting – so those precious public services would not suffer.”

The UK deficit is below the G7 average and below that of the US and Japan. Increased borrowing was necessary because the private sector was not spending. There is no need to cut now. The private sector needs to start spending the cash that it is sitting on. Cuts now will damage the recovery. If the private sector is not spending, and you remove public spending, then we are in serious trouble.