How Labour could counter the myth that it spent too much in government


2:27 pm - March 14th 2013

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by Annie Powell

Some might argue that this particular ship has sailed; that if Labour were to challenge the government’s narrative on spending, they should have done so straight away.

While it would have been better to do so in 2010, this really is a case of better late than never, not least because the government’s poor handling of the economy should weaken its version of events and make the public more receptive to Labour’s fight-back.

Once the Labour party starts to tackle the myth of excessive borrowing, it will be much easier to push for government-funded investment.

There are some who might say that advocating such a policy would be playing straight into the government’s hands. That Cameron and Osborne and Clegg will say, “Aha! We always told you that Labour was addicted to debt, and they still haven’t learned their lesson!”

But Labour can go on the offensive too, and they have the facts on their side. If this is to work, Labour needs to take a leaf from the Tories’ book and unremittingly drive its message home. Recently a few Labour MPs such as Angela Eagle and Emily Thornberry have spoken out against the idea that Labour’s borrowing is responsible for our economy troubles, but without the support of the top brass and a concerted initiative, their voices are lost on the wind.

Another counter-argument to this idea is that while the government’s message of “Labour borrowed too much and this has caused all our problems” is simple to convey, the counter arguments are too complex and will not penetrate public consciousness.

I disagree. I don’t think it’s difficult to say “actually, it’s not true that Labour borrowed too much. Before the financial crisis hit, Labour was borrowing less than John Major was in 1997.”

Angela Eagle recently demonstrated on BBC Question Time that it’s possible to get this message across simply and eloquently, saying that there wasn’t “a recession in 38 countries because [Labour] spent too much on schools and hospitals.” Nor is it difficult to convey the message that when the economy clearly needs a stimulus, the government should take advantage of exceptionally low global interest rates.

This would free up Labour in debates and media appearances. Currently when asked the question “so, you would borrow more?”, Labour spokespeople are afraid of giving a direct answer, and nothing turns the public off more than evasion.

Instead, Labour should say that, yes, initially the party would take advantage of record low interest rates to borrow for investment in much needed infrastructure.

This will help boost the economy, create jobs, and mean that borrowing will reduce as a proportion of the (growing) GDP. This should be contrasted with borrowing to fund welfare payments (to be fair, Labour do this already).

One final thought. Following the second world war, debt was well over 200 per cent of GDP. Yet this was the era in when the NHS was established and the government funded a large house building programme. And yet, miraculously, the world didn’t explode. This reveals the extent of the government’s scaremongering about our current levels of national debt.


Annie Powell is a former Labour party researcher. This is an excerpt from a longer piece that she wrote for the Fabian society.

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1. Shinsei1967

That Labour overspent is simple Keynesianism (which Labour are so keen on expounding these days). In the good times you run a budget surplus so that in the (inevitable) bad times you can borrow to fiscally stimulate the economy. The extent of Labour overspend in the mid 2000s is debatable but the range of the deficit is 3-5%. And that based on supernormal (and therefore temporary) high tax revenues from financial services and the housing market.

The level of national debt in the late 40s and 1950s is largely meaningless. Sure we survived. But we had rationing for ten years after WW2, there was little in the way of social security, most kids left school at 14, adult life expectancy was in the mid 60s so pensions were cheap, and we had to give up on Empire as couldn’t afford it (no doubt a good thing but still a “cut back”). There was also a massive decrease in government spending as a whole and large (and expensive) loans from the USA.

The sensible argument I think Labour should use is that, yes, they spent more than the UK’s sustainable tax base could cover (without raising taxes which they thought would be politically unpopular) but that that spending wasn’t “wasted” but was spent on useful stuff like new schools.

“Before the financial crisis hit, Labour was borrowing less than John Major was in 1997.”

Typical Labour misinformation. Five years BEFORE the financial crisis, Labour were already borrowing more per annum than Major ever had, and the subsequent increases per annum leading up to ’07 were nothing short of disgraceful.

The only reason the economy was stable for a few years after Labour gained power was because Brown was forced to follow the previous government’s spending plans, during which time he contented himself with creating dozens of stealth taxes to augment an already-strong balance sheet.

Labour in government 97-10 did the same as it always has – raised taxes for all, wasted the entire proceeds and now sits on the sidelines throwing eggs as someone else tries to clear up the mess.

What an utterly disgusting organisation you are.

I see the anonymous right-wing trolls have been instructed to rubbish this post.

@1

What is this massive decrease in Government spending? And, apart from the one negotiated by Keynes and largely eaten up by those taking advantage of Sterling being made convertible at the rate of $4.02 to the £, what are these large (and expensive) loans from the USA?

You ignore the fact that the UK continued to spend significant amount on the armed forces via the Territorials and National Service for many years after WW2, and much was also spent on transport – initially on the railway Modernisation Plan and then on Motorways.

And that’s before housing and urban renewal, which, as much had to be done to repair war damage, did not come cheap.

@2

The statement made by the OP is correct, as the graph shows. As the OP is no longer working for the Labour Party, your dismissive statement is wrong and gratuitous, as is the “nothing short of disgraceful” guff.

Labour stuck to Tory spending plans for just two years after the 1997 General Election. As to the rest of your comments, some people are intelligent enough to know the difference between fact, opinion, and pointless hot air. You come in the third category.

Shinsei: In the good times you run a budget surplus so that in the (inevitable) bad times you can borrow to fiscally stimulate the economy.

this has been addressed here. In fact Brown WAS being Keynesian, even then

http://labourlist.org/2011/12/the-reality-of-gordon-browns-spending-black-labour-cant-re-write-history/

5. Shinsei1967

@Tim Fenton:

“What is this massive decrease in Government spending?”

Govt spending in 1945 was £7.0bn (70% of GDP). By 1949 this had been reduced to £4.6bn (36% of GDP). That’s a massive decrease in nominal terms alone, let alone real terms.

I’m not sure where you got this idea I don’t think military spending, or reconstruction or transport spending also occured. Of course it did (though the motorways didn’t start till 1959).

The point is though that spending on transport is money not spent on health or education. And from 1949 to the mid 1960s government spending/GDP averaged c 35%.

New Labour spent according to the unfeasibly large tax take from the City of London’s Ponzi Scheme. As Mandelson said to the City speculators, paraphrasing Deng Xiaoping, `get rich and pay your taxes’. Dodgy growth theory indeed unless of course you are convinced that you’ve miraculously abolished boom and bust. Truth is New Labour rode Thatcher’s Big Bang all the way to the Big Crunch.

British capitalism is now bankrupt, the British state is bankrupt, the pound is being rapidly debased by the heirs of monetarism not to build hospitals and schools but to bail out the billionaire creditors of the bankrupt bankers and create a bogus bubble on the stock exchange so they can keep having their bonuses whilst the rest of us endure the resultant inflation.

There is only one answer to this crisis and that is neither Austerity or Borrowing but Economic Consolidation via socialism.

7. Shinsei1967

@Sunny

Making reference to the article you cite (written by you I notice !) about Brown being Keynesian even back then.

1) You refer to the need for government to expand spending as the corporate sector was hoarding cash. Unfortunately you forget the third player in this accounting identity – the 62 million of the rest of us. The household sector was borrowing substantially (mortgage and credit card debt quadrupled over these years).

2) The complaints about Brown “over spending” don’t usually refer to the early 2000s. Not many people would argue that fiscal policy wasn’t too tight in 2000 as Labour had continued with the Tory’s restrictive budgets longer than the Tories would have. And as I said much of the increase in spending was on useful public investment.

The criticism of Brown was the increase in spending from 2005 onwards especially when it was built on such a fragile tax base (from the massive profits generated from the City and housing markets). This was no time to run any sort of deficit. It’s a classic case of the precautionary principle being forgotten.

I agree. The government trots out this myth every day and Labour never stick up for ourselves. We know the truth, but we don’t say it.

The Labour government spent too much.

Well yes, no matter how much a Labour government spends the Conservatives will think it is too much. Labourites will always think taxes are too low and Conservatives will always believe they are too high. There is no right or wrong answer to how much of national income the government should spend. Keynes believed it should be around 25% of national income, which puts him in the same camp as the likes of the IEA. At best the coalition are viciously attempting to reduce spending to the low 40 per cent of GDP. Kinda indicative of the perils of citing people from different eras to support contemporary ideas. You see, there is no right and wrong answer because how much we want the government to spend will be determined by what we think the state should be doing.

A proper critique of the last governments stewardship of public finances was not that they spent too much. The argument is that it was unsustainable spending that built up a structural deficit. Our friend @ 2 thinks they significantly raised taxes, the problem of their bad stewardship was that they did not raise enough taxes to cover their spending.
http://bankingeconomics.blogspot.co.uk/2010/06/emergency-interim-uk-budget-22-june.html

The tax receipts share of GDP was virtually identical in 2007, compared to the share of receipts collected in 1999 planned by the Conservatives. The last government growth projections were consistently optimistic to the upside. They raised departmental spending and especially public sector pay based on those growth projections, when the growth disappointed they had to borrow the difference. We know the financial crisis caused the deficit to balloon, but we also know that self-evidently Labour allowed a significant UK structural deficit to build up in the public finances. That much should be obvious from the fact that our fiscal deficit is larger than most other comparable nations.

The problem with the structural deficit is no one can truly tell how large or small it is. People can estimate the structural deficit but it can’t be observed. If we want public finances to be sustainable they need to be somewhat in line with what we collect in taxes. Most of northern Europe collects a higher share of GDP in taxes and as a consequence the state does more. So again it does not come down to issues of spending too much, but it is related to what we want the state to do and what kind of society we want to live in. Borrowing to build public infrastructure fit for the 21st century, or borrowing to invest in education is sustainable because that is investing in the future. Borrowing to pay welfare benefits or to give public sector workers a pay rise is not good management of public finances. We have been doing too much of the latter in recent years.

Try the comparisons in the OECD chart here for: General government expenditures as a percentage of GDP (2000, 2007 and 2009)
http://www.oecd-ilibrary.org/sites/gov_glance-2011-en/03/04/giii-4-01.html?contentType=&itemId=/content/chapter/gov_glance-2011-10-en&containerItemId=/content/serial/22214399&accessItemIds=/content/book/gov_glance-2011-en&mimeType=text/html

A major difficulty with making international comparisons is that the distribution of functions and spending differs from one country to another depending on the division of executive responsibilities between central and regional or local governments. “General government expenditures” takes both into account. Making such international comparisons on standardised definitions is one of the purposes of OECD.

HM Treasury as well as other national treasuries, the HoC Library and the like in other OECD member countries, academics via uni libraries, and accredited journalists have better access to OECD publications and data than private individuals on pensions like me. In the early 1990s, I used to be able to afford to sometimes buy OECD publications but the prices have soared as OECD governments have cut back on national subscriptions. But try Googling.

Richard W: “The problem with the structural deficit is no one can truly tell how large or small it is. People can estimate the structural deficit but it can’t be observed.”

Absolutely.

There are handy weekly tables at the back of The Economist making comparisons between national budget deficits as percentages of national GDP as well as much else:
http://www.economist.com/news/economic-and-financial-indicators/21573576-trade-exchange-rates-budget-balances-and-interest-rates

The “Center for American Progress” has produced a helpful research paper with many charts and tables on: Comparing Public Spending and Priorities Across OECD Countries (October 2009):
http://www.boell.org/downloads/Dewan__Eittingler_Comparing_Public_Spending.pdf

By the account of Table 1: Total public spending as a share of GDP (2004-2007 average), the UK is ranked as “Medium” compared with Austria, Denmark, France and Sweden, which are ranked as “High”.

That comparison rather destroys the promoted myth that the Labour government was a big spender before the financial crisis broke in the autumn of 2007.

“but that that spending wasn’t “wasted” but was spent on useful stuff like new schools.”

Nor was much of that spending accounted for in the UK national debt. One of the tricks Brown pulled was to move this off balance sheet via PFI (over 250bn of it), whilst still ultimately being a government liability.

UK Nominal GDP was 1460bn in 2010. The official debt/GDP ratio was 52%, up from 42% in 1997. The real debt/GDP ratio, with PFI liabilities was more like 69%.

http://www.ukpublicspending.co.uk/spending_chart_1900_2011UKp_XXs1li111mcn_G0t

That is before you account for the massive unfunded pension liabilities (4.7 trillion or 320% of GDP as of 2010 according to the ONS) of the state, which also increased massively under Brown and Labour (thanks to Brown’s massive raid on pensions, the large increase in the size of the public sector and the increase in state and public sector pensions). It’s hard to get data for 97 as governments weren’t forced to disclose the data back then, but the estimate is that back then the unfunded pension liabilities were around 2.5 trillion.

http://www.ons.gov.uk/ons/rel/pensions/pensions-in-the-national-accounts/uk-national-accounts-supplementary-table-on-pensions–2010-/art-mainarticle.html

You can’t sit there and argue that Labour didn’t spend wastefully and run up huge debts if you ignore much of the extra spending! This sleight of hand on Brown’s part was his biggest trick.

14. Edward Lud

So what did Liam Byrne mean when he left a note in the Treasury chief sec’s dispatch box that, “Sorry, there’s no more money”?.

15. Keith Reeder

“So what did Liam Byrne mean when he left a note in the Treasury chief sec’s dispatch box that, “Sorry, there’s no more money”?.”

It was, as been explained many, many times since, a “joke”.

A piss-poor one, but a joke nevertheless.

16. Edward Lud

And you buy that?

“A piss-poor one, but a joke nevertheless.”

The size of the budget deficit – see the link to The Economist @11 – is indeed daunting. But the budget deficit comes from the collapse of the tax revenues as the result of the financial crisis and the ensuing recession, not from profligate government spending before the crisis as reference to the OECD data show – see the link @12.

As Bob Diamond, previously CEO of Barclays Bank said in a BBC Today interview broadcast on 4 November 2011 that the banks must accept responsibility for what went wrong. In the interview – which I listened to – he repeatedly said that banks must work towards a situation where banks could fail without taxpayer support and without causing systemic instability of the financial system. The FT reported the interview (subscription barrier):
http://www.ft.com/cms/s/0/292c4e48-0658-11e1-8a16-00144feabdc0.html#axzz1cmIopk8y

If the Labour government was to blame for the finacial crisis it was through insufficient regulation of the banks and by taking no steps to rein in the house-price bubble – but consider the likely response of the Conservatives to that when they had been campaigning for Deregulation and Cutting Red Tape.

18. Planeshift

“So what did Liam Byrne mean when he left a note in the Treasury chief sec’s dispatch box that, “Sorry, there’s no more money”?.”

It means Liam Byrne is a prick who is a liability for the labour party and should have been sacked then.

Wonkish post.

“Automatic stabilisers” are a regular feature of the fiscal systems of advanced market economies.

When the national economy dips towards a recession, government tax revenues fall – thereby taking less spending power out of the economy – while government spending tends to rise because of higher unemployment benefit payouts – thereby injecting spending power into the economy. The effect is to dampen the downswing. The same stabilisers work in reverse to dampen upswings.

If the government’s budget was in balance or nearly so, a recession will therefore automatically create a deficit or deepen an existing deficit.

In Britain, government tax revenues were especially dependent on the profits, incomes and bonuses generated by the financial services industry because that industry was and is unusually large relative to Britain’s national economy as compared with almost all other advanced market economies. The financial crisis therefore made a relatively big dent in the government’s tax revenues.

This gives an insight into the relative international importance of Britain’s financial services industry:

“The worldwide volume of foreign exchange trading is enormous, and it has ballooned in recent years. In April 1989 the average total value of foreign exchange trading was close to $600 billion per day, of which $184 billion were traded in London, $115 billion in New York, and $111 billion in Tokyo. Twenty-one years later, in April 2010, the daily global value of foreign exchange trading had jumped to around $4.0 trillion, of which $1.85 trillion was traded daily in London, $904 billion in New York, and $312 billion in Tokyo.”
Krugman and Obstfeld: International Economics (Financial Times 9th ed.) p.355

20. Charlieman

@19. Bob B: “The worldwide volume of foreign exchange trading is enormous…”

What is the relationship between trading volume and money spent in the UK?

What is the relationship between trading volume and UK tax revenue (direct and indirect)?

What about the UK companies that have not sacked people over the last two or three years in order to retain human capital? They have sacrificed to keep the company running, to maintain the skills that will be required when an order arrives.

Do you not reckon that manufacturing capitalists deserve respect?

21. Charlieman

@14. Edward Lud: “So what did Liam Byrne mean when he left a note in the Treasury chief sec’s dispatch box that, “Sorry, there’s no more money”?”

Byrne incidentally reminded us that millions of people have no sense of humour. The fact that the UK is broke is known to us all. And if you can’t cope with Liam Byrne’s humour (whether or not it was a good joke), how on earth will you cope with the future?

@15

Not a particularly original joke either. Reginald Maudling left a similar note for the incoming Labour govt in 1964, back in the days when these positions were occupied by adults.

Charlieman: “What is the relationship between trading volume and money spent in the UK?”

Exports of goods and services generate incomes for those engaged in their production and the financing of the transactions, including returns to capital employed. Britain is the second largest global exporter of services after America. The incomes generated are spent on buying goods and services in Britain – some of which will be imported – and buying financial assets.

“What is the relationship between trading volume and UK tax revenue (direct and indirect)?”

Incomes are taxed – when not shifted by multinationals to some subsidiary located offshore with lower corporation tax rates via transfer pricing – and spending in Britain is subject to VAT, hydrocarbon oil taxes, taxes on alcoholic drink etc and the like as well as stamp duty on the purchase of financial assets.

“What about the UK companies that have not sacked people over the last two or three years in order to retain human capital? They have sacrificed to keep the company running, to maintain the skills that will be required when an order arrives.”

Absolutely. This points to the continuing reports about skill shortages in the labour market. Of course, one implication of rising employment figures and a flat economy is that Britain’s measured labour productivity per hour worked – already lowish by the standards of many peer-group countries – is falling. For all that, large corporates are holding on to substantial liquid balances. Meanwhile, business investment is falling – by reports, down £400m in the final quarter of last year.

Try this from The Economist in January: Britain’s productivity puzzle – should we be worried?
http://www.economist.com/blogs/freeexchange/2013/01/britains-productivity-puzzle

24. Edward Lud

Um, Charlieman, wasn’t the OP about how Labour didn’t in fact bankrupt the country?

A budget deficit as the consequence of a recession is a regular experience in market economies for the reasons explained — tax revenues fall as the result of lower commercial activity while government spending tends to rise from increased payouts of unemployment benefits.

There is absolutely nothing unusual about that. Suppose a government then reacts to the increased budget deficit by cutting government spending – which takes spending out of the economy – and by raising taxes – which takes spending power out of the economy. The consequences of such a policy are to depress the economy further.

That important lesson was something learned from the keynesian revolution. A regular response of governments during the depression of the inter-war years was to cut government spending to reduce budget deficits. The effect was to extend the depression.

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