Sunday, 21 May 2017

Tory Myth 1- Labour Crashed the Economy and it’s only safe in our hands

One of the most successful political myths ever is that the previous Labour government's incompetence caused our economy to crash in 2008 . Typical Labour just couldn’t help themselves. They just spent and borrowed too much so that they “maxed out the credit card", leading to the credit crunch. This is what millions still believe. However, it’s simply untrue. A lie is a lie no matter how many people genuinely believe it. It was excessive private debt not public debt which caused the crash. As Sir Nicholas Macpherson, the chief civil servant in the Treasury said in 2015, Labour spending and borrowing had nothing to do with the cause of the crash. Instead “The 2008 crisis was a banking crisis pure and simple. Excessive risk had built up in the system; the regulators had failed to appreciate the scale of the risk or address it.”

This article examines the actual evidence behind the economic reputations of Labour and Conservatives in government. This evidence would shock many, because the truth is so far from what most of us have been led to believe. For those without the time to read the whole article, I'll sum up here what the actual evidence shows:
  • The economic crisis was caused by excessive risk-taking by (mainly) US banks. It had nothing at all to do with the Labour’s government borrowing.                              
  • The last Labour government might be criticised forfailing to regulate our banks more. However, at the time the Tories were calling for our banks to be regulated less!
  • Labour did what had to be done to rescue our banks and save the country from economic disaster.
  • This inevitably increased our national debt (but still well below the debt spikes seen in the world wars).
  • The country has always had a national debt since 1692 and it always will.
  • However, the last Labour government, like all Labour government before it, borrowed less than Conservative ones, ran up fewer and smaller annual budget deficits and produced more surpluses.
  •  Just before the crash in 2007 our national debt was at only 36% of our national income- less than the 40% national debt Labour inherited from the Tories in 1997 and below average debt levels of the last 300 years. The annual deficit was then at a tiny 0.6% of income and falling.
  • Labour governments on average, including the last one, have brought about more economic growth and better employment levels than conservative ones.
  • Seven years of Conservative-led government have seen our national income per head/productivity and wage growth all falling badly compared to most of our competitors.
  • The current Conservative manifesto in contrast to the Labour gives no costings for their spending plans and tax cuts and has no real economic plan to revitalize our stagnating economy. 
  • The Conservatives current plans only confirms that as per their record in government that the Tories are actually the ones who cannot be trusted to manage the nation’s money and economy.
The Economic Crash was caused by excessive risk-taking by US banks. It had nothing at all to do with UK government borrowing

If you want to understand what actually led to the economic crash, the banker’s bail out and the recession and austerity that followed I recommend watching the excellent film “The Big Short”. 

The origins of the crash weren’t even in this country, but in the USA. It was all caused by casino-esque risk taking by bankers in the sub-prime mortgage fiasco. They lent too much mortgage money to individuals without the means to pay back. They then commoditising those transactions into bundles of loans which were bought and sold. Of course, given the international nature of financial services our own bankers got caught up in the risk. As we had the second largest financial services industry after the USA our banks were more exposed than most. Gordon Brown’s government had to act decisively to prevent our whole financial system falling apart and the untold suffering that would cause to millions of savers and borrowers. They had no option but to bail out the banks- an extremely costly endeavour. It was a huge financial disaster resulting from the banks’ excessive risk-taking that very few had detected and predicted, even within the banking industry (as the film illustrates). If there was any failure of government it was the failure to monitor and regulate more tightly financial services. That was primarily a failure of US government where the problem originated- and note that was a right wing Republican government under George Bush! How far Britain could have insulated itself by tighter regulation is debatable. However, what is not debatable is that the Conservatives would not have done any better. We know that because in 2007 at the very time when the crisis was about to hit rather than suggesting tighter regulation of our financial services they were demanding less regulation! Effectively they were calling for petrol to be poured on the flames of the fire! In a 2007 Conservative party report, endorsed by David Cameron- “Freeing Britain to compete"  said:

“We recommend deregulating venture capital fund raising, and investment for professional investors………A Conservative government should relax banking regulation, allowing a new breed of venture/micro-credit institutions…………….
We see no need to continue to regulate the provision of mortgage finance, as it is the lending institutions rather than the client taking the risk……

The last Labour government (and the ones before it) borrowed less than Conservative one

And so what about that Labour spending and borrowing? As hard as it may be to believe, the evidence from Treasury figures show that as a proportion of GDP, i.e. national income, during its 13 years the last Labour governments spent and borrowed less than Conservative governments in the previous 18 years. They also ran up fewer current account deficits and more surpluses. And this fiscal prudence wasn’t just unique to New Labour. Overall all Labour governments since the war on average have always borrowed less than Conservative governments and have always repaid debt more often than the Conservative ones. The picture is more mixed when it comes to public spending. Sometimes Conservative governments have spent a greater percentage of GDP and sometimes Labour governments have. However, overall Conservative governments have actually spent slightly more of our income. I know all of this is contrary to what most of us have grown up to believe, but any objective analysis of the facts shows this to be true.

The National Debt
Some people get very worried over the size of our national debt. They really shouldn’t! Above is a graph of the UK’s national debt since 1692. Do you notice anything? Over the past 300 years the country has always been in debt to the tune of at least 20% of our annual income- even when Britain was at the height of its empire. In fact, the empire was built on a funding of national debt. Mostly our national debt has been at or above 50% of our annual income. At real crisis times that debt has shot up to 150, 200 or even 250% of income- like during the Napoleonic wars (the first major peak above), the first and second world wars (the second and third big peaks). After those crisis peaks the debt has then gradually been brought down again, as can be more clearly seen from the graph below.
When people compare our national debt to a credit card it’s a completely false analogy. The best
domestic analogy is a mortgage, but a mortgage to an immortal man. Even now our national debt is less than a year’s worth of our national income- at 89% or 0.9 times our annual income. Few of us would have concerns over paying a mortgage of a lot more than 0.9 x our annual income.Banks commonly lend up to 3 or 4 x a person’s annual income, i.e. 300 or 400%. The thing with a mortgage is that since individually we won’t live forever we do have to pay it off after 25 years. But countries aren’t people so they’re not expected to die. Therefore, it isn’t a problem that as a country we continue to carry a debt, as long as we can keep paying up the interest on the debt. The reality is that in modern times we have always had a national debt and we always will. No one has any intention to ever pay it off. It just isn’t the sort of thing you pay off. It’s public debt that keeps economies moving. It always has and it always will. (In fact the UK is not just a debtor it’s a global creditor to others and is actually owed rather more than it owes.).Of course, if we let the debt get too big that’s not a good thing as this will increase the interest payments on the debt and can cause a loss of confidence in the country’s ability to pay. However, we are a long way from that point. Many developed countries carry a rather higher national debt than we do. Currently Japan’s national debt is at 250% of GDP and the USA’s at 104%. In fact some of the countries with the lowest national debts are some of the poorest eg Afghanistan at 6.6% and Equitorial Guineau at 6.4%.
 In 2007 before the Global Financial Crisis our national debt was at a very moderate 36%- actually below its historic average of the last 300 years, and less than the 40% the Labour had inherited from the Tories. It is therefore simply untrue that Labour had built up an excessive debt before the crisis. And, as we’ve seen, that crisis had nothing to do with our national debt anyway. Of course, once the crisis happened the Labour government had no alternative but to pump into many billions to a rescue fund for our banks to prevent our economy sinking. That is why our national debt surged after the crisis, but it still reached nothing like the peaks following the world wars. Under Labour its post crisis peak in 2010 was about 60%. Under the Coalition/Tory governments however the debt has continued to rise and now stands at 89%. Unfortunately their ham-fisted austerity policies have proved to be self-defeating. It has put a break on economic growth and therefore held back our national income which should have helped us get the debt under control sooner.

The annual deficit

The Tories also got us all very worried about “the deficit” and how Labour can’t be trusted with that either. In 2010 they pledged to eliminate the deficit by 2015, which they failed to. They then moved their goalposts and planned to get rid of it by 2020.. They’ve now admitted they will also fail to do that and have moved their goal posts a second time to 2025! So what is “the deficit”? The current bu dget deficit is the annual difference between the government’s day to day spending and its income (principally from tax receipts). This covers things like running our NHS, police, schools and paying pensions & benefits. It excludes investment in capital projects, e.g. new roads and new schools built. In 2017 the current budget deficit stands at approx. £14 billion. That is just under 1% of GDP and so in itself not a significant problem when the interest rates we must pay on any increase in debt are so low. George Osborne really shouldn’t have got so stressed about it!  Overall it is better to keep the annual current deficit low or in a slight surplus, to avoid unnecessarily adding to the national debt . But can Labour be trusted to manage our deficit? What is their actual record in government like compared to the Tories? Well, have a look at the chart below.

We can see that for 30 years after the war all governments- Labour and Conservative- ran current surpluses as they both strove to bring down the high national debt built up in war. It was the Labour governments of Attlee and Wilson who achieved highest surpluses at 6.3% (1950) and 7.6% (1970). The lowest surplus of 0.9% was under the MacMillan conservative government (1961)
Then for 15 years (1975 to 1989) successive Labour and (mostly) Conservative governments ran fairly small deficits, the highest being at 2.2% under Mrs Thatcher’s Conservative government in 1981. Then in 1989 under Mrs Thatcher we briefly went into surplus again (at 1.9% of GDP). However, under John Major’s conservative governments we soon went into deficit again, particularly after the ERM crisis/recession. Under him the deficit peaked at 5.7% in 1994 before gradually declining. It was then the New Labour government that brought it into surplus in the late 90s/early 00s, maxing out at a 2.3% surplus in 2001. Labour then ran small deficits but at historically fairly low levels of less than 2%. By 2007 they had brought this down to about £10 billion- 0.6% of GDP (lower than currently at just under 1%).

Following the Global Financial Crisis of 2008 and the unavoidable bankers’ bailout the deficit temporarily ballooned again in 2009. In 2010 it peaking at 6.9% (£50 billion). Since then it has been gradually reduced to £14 billion/just under 1% of GDP. However, it is still higher than it was under New Labour before the Crisis.

So can Labour be trusted to manage the nation’s money?Based on their record-yes!
Yes absolutely- based on the historic record. The overall record shows that, contrary to public misperception, Labour governments, including the last Labour governments, have actually borrowed less and run lower current account deficits and more surpluses than Conservative governments. Furthermore, before the bankers caused the GFC and recession public debt was at historically relatively low figures and we had an unremarkably modest and declining small current account deficit. The Labour party would actually have a very strong case for libel for being falsely accused of having been financially reckless so as to have caused or contributed to the crash. It is so very far from the truth that you have to say it’s not merely misleading spin but a bare-faced lie.

The more important economic issues are employment and economic activity. Here too Labour have a better record

Whilst Labour’s record on managing the nation’s debt is actually better than the Conservative, there are in fact rather more important indications of economic performance. As the great economist Maynard Keynes said, it’s the state of employment and the growth or decline in national income (economic growth) that really matter. Look after employment and improve national income and the budget should look after itself.
During the last labour governments up to the Crisis the UK enjoyed a period of 10 years of steady economic growth- the longest uninterrupted period of growth in 200 years. The UK’s growth of GDP per capita – 1.42% a year between 1997 and 2010 – was better than in any of the other “G6” countries: Germany (1.26%), the US (1.22%), France (1.04%), Japan (0.52%) and Italy (0.22%).  Under New Labour UK’s strong productivity performance relative to other countries was a continuation of the trends during the period of Conservative governments from 1979. By 2007, the UK still lagged behind the US , but the gap had closed to 33%. In fact, the UK had a faster catch-up of GDP per head with the US under Labour than under the Conservatives.

Since 2010 our GDP per head (the only way to sensibly measure real income) has flatlined or fallen below most of our competitors and relative to them. Our economic productivity has plummeted, well below the likes of France and Germany. In terms of their economic output average French and German workers do more in four days than we do in five. Incredibly, despite her anti-immigration rhetoric, the only thing that stops our gross GDP from looking too bad is our net immigration. Immigrant workers have usually been more productive and their numbers have increased the population so that our gross total income has increased even as our income per head has fallen in real terms. Their numbers make the fact that our economic growth has flatlined and productivity fallen (see eg Angry Voice “How The Tories used mass migration to fake a recovery”)

In depth research by the likes of the London School of Economics has found that many of the last Labour governments’ policies were beneficial for economic growth, and that this growth was not all an unsustainable ‘bubble’, (as some suggest) but was based on some real productivity increases fed by growth in new skills and technology. Where they did fall down is where the Tories (according to their own stated policies) would have done even worse- financial regulation.

As for unemployment, since 1970, the best average annual unemployment rate was achieved by the Heath Conservative government of 1970/4 with 3.4%, and by far the worst under the 1979/97 Conservative governments, with an average annual rate of 9.3%, and exceeding 10% for 6 full years.  The 1974/9 Labour government had an average rate of 4.9%, and the 1997-2010 government 5.6%.  The 2010-15 Coalition government’s average rate was 7.6%. Overall, therefore Labour governments have had a better record on employment than Conservative governments.
However, when considering the state of employment today we need to look not just at the number of unemployed/employed but the nature of that employment and what it pays. Since 2010 especially we are now in an age of casualised, fragmented and often partial employment. Of course earnings took a a hammering following the crash, but under Conservative led governments since 2010 in real terms they have continued to fall.  We have seen real wages decline by about 8% in real terms since the crisis, briefly mending and now in fact declining again. This contrasts with most of our competitors who have actually turned things around to produce real wage growth. Between 2007 and 2015 our UK wage growth declined by 10% in real terms, putting us right at the bottom of the league for pay growth of developed nations, equal with Greece. On average OECD countries experienced wage growth of 6.7%, with Germany 14% and France at 11%.

The Future- an economic plan to revitalize the economy- Labour have one. The Tories don’t

Interest rates are currently at a historic low point. Meanwhile the country’s infrastructure is crying out for investment and our economic growth is flatling. At such a time it makes far more economic sense to increase the debt to invest The economic growth resulting from such investment potentially should earn us a lot more than the extra interest we will pay. (This after all was how Britain grew its empire). This is why most economists welcome Labour’s £250 billion national transformation fund. And if we get the bad Brexit deal many fear such an economic shot in the arm will be essential to prevent a severe economic recession. The Conservatives present no such plan in their own manifesto.

Conclusion- it’s the Tories not Labour who can’t be trusted with our economy

The myth is that Labour are financially reckless, overspent beyond our means which led to the 2008 crash and the austerity and low wage economy we are all suffering from. Meanwhile only the Conservatives know how to manage prudently the nations’ finances to bring about the economic growth that will benefit us all. The truth is very different. As the above analysis shows, Labour governments, including the New Labour governments, have actually more carefully managed the nation’s finances than Conservative governments, borrowing less than them. Recent labour governments have also overall achieved better real economic growth and employment rates than recent Conservative governments. The Global Financial Crisis which led to recession and increased national debt was not in any way caused by the Labour government’s management of the nations’ money. If there was any fault by them it was in failing to more tightly regulate our banks. However, the Conservatives would only have regulated them less!

The austerity economics of the recent Conservative governments have been largely self-defeating and have not helped prevent our national debt rising further. They have led to the Conservatives twice failing their own targets for wiping out the annual budget deficit. Their approach initially took the economy into recession and then led to only weak growth and the longest period of decline in real wages for over 50 years.
The reality is the Conservatives’ reputation for economic competence is completely unjustified. And their current manifesto certainly does nothing to change that:
  •       Unlike Labour they give no detailed costings to explain how they would pay for any of their manifesto spending and tax cutting commitment. This of course is just what you’d expect from a Conservative party which has always been less careful with our money than Labour
  •       Most economists agree that their stated approach to Brexit if followed would be economically disastrous as there will be no free trade deal without accepting freedom of movement which they have made their red line.
  •       Most economists also agree that their stated approach to immigration to bring it down to 10,000s would be similarly economically disastrous as national demographics mean we need net migration of at least 200,000 for the foreseeable future.
  •       Unlike Labour they have no plan to reinvest and revitalize our economy which it will badly need after Brexit.

For further details of the research behind the above analysis see e.g. LSE’s “Labour’s Social Policy Record: Policy, Spending and Outcomes 1997-2010”, Tax Research UK website e.g. the article “The Conservatives Have been the biggest borrowers after the last 70 years” and, Global Future Report on UK immigration needs Feb 2017 and "Angry Voice". 

No comments:

Post a Comment