Labour did not overspend in office. So why do Labour’s leadership candidates keep saying so?

Perhaps the most depressing aspect of the Labour leadership contest is hearing the candidates acquiescing in the myth that Labour in office overspent – and, by implication, accepting the Tory framing that Labour crashed the economy.  Of course it is more nuanced than that, but the outcome of the recent election shows that this is not a debate in which nuance plays much part.

The simple fact is that Labour did not overspend.  In fact, as a percentage of GDP, New Labour spent less than Margaret Thatcher – an average of 41.5% of GDP against 44.2%.  And in fact that figure hides the fact that after the 2007/8 crash, with the economy contracting viciously and rapidly, public spending as a proportion of GDP inevitably rose.

Moreover, spending is only one aspect of a deficit – you also need to consider taxation.  And, again, Labour taxed less than Thatcher as a proportion of GDP – an average of 37.5% of GDP as against 42% under Thatcher. And, by 2007, public debt as a percentage of GDP was falling.

There’s an obvious point to be made here – the economy was growing throughout the Blair/Brown years up until 2007/8, so you would expect the proportion of GDP to be accounted for by taxation or spending to be smaller.   Although Labour ran a surplus for more years than Thatcher or Major (and certainly Osborne) ever managed, Labour did run a small deficit for some of its period of office – in defiance, some would argue, of Keynes’ argument that you should run a surplus in the good times.  But this was largely due to investment spending. The UK has persistently had one of the lowest rates of capital investment in the developed world.  The financialisation of our economy has meant that quick-buck speculation in financial markets has long been more attractive.  And since 2010 capital investment  has fallen faster in the UK than anywhere else in the developed world, adding to our economic woes – especially the productivity crisis, in which low investment and casualisation of labour combine to continue the slow bleeding of Britain’s economic potential. During the Labour years, Government moved in to fill the gap left by the private sector’s investment strike: money spent on schools, hospitals to improve our national infrastructure.

There were mistakes of course.  Labour in office was too willing to accept the assumptions of the financial sector, and did not spot the perils inherent in a boom founded on rising property prices and private credit.  It was private, not public, indebtedness around the world that drove the dynamics of the 2007 crash, and that exacerbated its impact here in the UK.

So why are Labour’s leadership candidates apparently falling over themselves to trash the last Labour government’s economic record?

It’s difficult to see anything other than a failure of nerve – a complete reluctance to take on the Tories and to challenge their economic rationale.  It’s almost as if they have given up, and simply decided that framing an alternative economic narrative is too difficult.  But in doing that you are allowing the Tories to frame and dictate the debate, and you are further compounding the alienation from the political process of those for whom the economy just isn’t working – the people who deserted Labour in 2010 and 2015. You are allowing conservative populists – whether in the guise of UKIP or the more nuanced economic defeatists of Blue Labour – to push economics out of the debate, and to frame economic failure in cultural terms.  And history shows us that’s an incredibly dangerous game to play.

Only weeks after a brutal election result, Labour is exhausted and traumatised.  But unless we are going to sink into a long-term decline, with endless re-runs of May 8 2015 as signposts on the road to political oblivion, we have to get a grip on the economic debate.  We have to show that we have a credible alternative.  And the irony is that so much of it was in place in the election manifesto on which we were just defeated: significant increases in the minimum wage, apprenticeships to create better skills, and so on.  But we also have to understand – as Blair and Brown did and the current leadership candidates, for all the mutterings about Blairism, apparently do not – that serious investment is needed, and where the private sector is unwilling or unable to provide it, the state has to step in.  And that means using our ability as a state with a sovereign currency to use public expenditure and public borrowing to kick-start our way out of our current economic decline.

And it’s a political as well as an economic imperative.  It’s not just that this is the only way in which we can move towards our aims as a party of securing a more just and equal society; something that is made immeasurably more difficult in by the zero-sum of redistribition at a time of economic decline.  As Keynes realised, it’s about politics too – about creating a more stable and functioning democracy in which people feel included in the process.

And from Labour’s potential leaders, we need a bold, inclusive and optimistic narrative.  Britain’s economy is broken: we can fix it and make it work, and make it work better for the majority.  Keeping hold of nurse is not an election-winning strategy for a non-conservative party.

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12 thoughts on “Labour did not overspend in office. So why do Labour’s leadership candidates keep saying so?

  1. “Keynes’ argument that you should run a surplus in the good times. ”

    Find me a quote from Keynes post General Theory (1936) where he says this.

    He doesn’t. It is another myth which people keep repeating without attribution.

    There is never a need to do anything over the cycle – particularly in a floating rate currency where by definition everything is automatically ‘balanced’ anyway.

    What all the so called Labour leadership candidates are saying (by accounting identity) is that the private sector failed to borrow enough in 2008 – since saving more than borrowing by the private sector is what causes a government deficit.

    Anybody who thinks that the private sector failed to borrow enough in 2008 needs their head examining.

    • After scouring the Internet for the source of this quote, I eventually found it, courtesy of ukmc – http://cas.umkc.edu/economics/people/facultyPages/wray/courses/Econ601%202012/readings/Keynes%20World%20Crises.pdf. (p390 ‘Boom control’) . Keynes is talking about how to dampen down a potentially inflationary boom without risking another recession by raising interest rates prematurely. He says nothing about running budget surpluses or balancing the budget over the cycle. So NeilW is right – its a myth, which deserves to be more widely pointed out.

      • The quote I’m referring to is of course: “The boom, not the slump, is the time for austerity at the Treasury”, He does say that in the article, in the context of boom control, but he says nothing about running surpluses in good times etc. Maybe he says that somewhere else, but if so I certainly can’t find it and have I never seen a referenced source.

  2. Pingback: Labour did not overspend in office. So why do Labour’s leadership candidates keep saying so? | Notes from a Broken Society | Vox Political

  3. I totally agree! What can be done to reverse this appalling situation? Maybe some kind of petition to the aspiring leaders to tell them to stop being bullied by the tories? If anyone has a better suggestion I would love to hear it. I still feel depressed at the result of the election and I fear for the future of the UK.

  4. Pingback: Economic fatalism and the Labour Party leadership election | Notes from a Broken Society

  5. I agree: now do you want to look at the idea that Labour had a ‘brutal election’? And therefore the idea that any left ideas have been comprehensively rejected? Have a look at the vote percentage figures, rather than the seat allocation figures: they tell a slightly different story. Labour lost by only 6% and in fact increased their share by twice as much as the tories did. Not really that bad a loss. The mismatch between vote percentage and seat allocation, which can also be seen in operation behind SNP’s success and UKIP’s failure (not that I like UKIP, but they were appealing to an unheard voice), has been an unsolved problem for years, and needs solving if we want a real democracy.

  6. Pingback: After IDS: some questions for Labour’s Parliamentarians | Notes from a Broken Society

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