It was the risk not the spending that Labour got wrong

by Anthony Painter

Ed Miliband is in a bind. He is tied to a fiscal policy that the public believes was profligate and irresponsible. His strategy so far has been to defend that record to the best of his ability. That is not enough. It may be time to switch tack.

The debate is homing in on the question of whether Labour was spending too great before the 2007 turbulence. And actually if you pull out the figures the answer is marginally on the side of ‘defend the record’- on the face of it. Current spending was in deficit ahead of the crisis though not catastrophically so- 0.3% of GDP in 2006-2007. The public sector net debt was lower than in 1997 at 36.6%.

None of this looks irresponsible in fiscal terms. Public sector productivity and inefficiency tell a slightly different story- there is no doubt that the money invested in public services post-2001 failed to raise output as it should have done. Steve Richards in his articulation of the case for the defence in the Independent this morning acknowledges that fact:

“Labour failed to address inefficiencies in the public sector and some of the additional investment was wasted needlessly, but the overall spending was necessary at the time, as Blair discovered then and some senior Tories discover now.”

So the case for the defence seems to exonerate Labour for imprudence but is more ambiguous on wastefulness.

Unfortunately, the prosecution has a powerful counter case on the imprudence argument. Before moving to that, it is important to state that the Convservatives and Liberal Democrats are in the dock here also. They tied themselves to Labour’s spending plans (at least) so they also made the misjudgement.

The issue here is not the deficit in advance of the financial crisis. It is the riskiness of the position. Anyone wishing to go back to Budget 2008 can see the issue with absolute clarity. Table 1.1 is Exhibit A:

Essentially, Labour had set spending without any real deep assessment of the riskiness of the position. The spending cycle had become locked into the electoral cycle rather than the risk of any decline of economic growth impacting significantly on tax revenues. What this meant is that Labour – and the Conservatives and the Liberal Democrats- erred on the side of incaution. Then it all went wrong.

So Phil Collins is right when he says that Labour was driving without insurance. John Rentoul, Iain Martin, and Martin Kettle are similarly right to question the decisions that were taken in the two to three years ahead of the financial crisis/ the leadership of Gordon Brown. It’s not that Labour was driving recklessly. It’s just that when an unavoidable accident happened it wasn’t covered.

What does this mean for the political strategy going forward? Labour will have to be honest about its mistakes sooner or later. They are understandable but acknowledging them shows that Labour will learn from them. The major mistake was to underestimate risk in the position. We are all in this together- everyone underestimated the risk to the position but it is an important lesson moving forward. Of course, the Coalition is taking different risks with the pace of its consolidation: to jobs, growth, and public services. There are many different types of risk.

Framing Labour’s position as a better and more comprehensive understanding of the risks that policy-makers are taking seems to be the best and most constrictive route forward but it requires an acknowledgement. Without an acknowledgement, Labour will not get to make its economic case.  The question is then one of timing.

There are two schools of thought here: do it soon and get it out of the way or leave it to allow the Government to stew in its own juice for a year or two then break with the past. On balance, the former is the better course than the latter. Yes, it will draw fire away from the Government for a time and that is unfortunate as they should have to own every bad decision and bad cut they are making.

But to avoid confronting this will smack of procrastination and short-termism.

No, the Budget seems like an obvious time to do it. It would have to be matched with a reassessment of Labour’s fiscal consolidation plan with the (Tory-Lib Dem) Emergency Budget 2010 as the baseline rather than the (Labour) March Budget 2010- we’ve moved on. A clearer account of the past linked to a different approach in the future will be politically painful in the short-term. Over time though, it will enable Labour to be heard on the economy once again.

The alternative? Waiting for an economic calamity that probably won’t come. It’s not clear that even constitutes a strategy. It’s just another gamble.

Anthony Painter’s Twitter feed is @anthonypainter.

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12 Responses to “It was the risk not the spending that Labour got wrong”

  1. Gary says:

    To redefine overspending as risk is just sophistry. Your table 1.1/Exhibit A is key.

    The table essentially says that Labour was running a deficit 2006, 07 & 08. Running a deficit would be consistent with a Keynesian position of running deficits during slowdowns.

    But of course no sane person though we were enduring a slowdown then. So to run a deficit during a boom is to reject Keynes, with no clear alternative theory underpining those spending levels.

    But as you yourself identify, there was an underpinning logic – but it was an electoral logic, not an economic one. The spending levels were unsustainably high and bereft of economic logic.

    That’s not a risk error – its simply a spending error. There was no *risk* of a downturn – they are an inherent flaw in capitalism. The impending downturn was *always* a known fact. The precise timing, proximate cause and consequences were not knowable (unless you listened to the most famous and successful investor in history), but anyone with a passing familiarity with capitalism already knew that.

    GB *chose* to spend too much. He understood the flaws of capitalism. He understood we were *not* in a downturn. he knew that a deficit during a boom was without economic logic. But he wanted to spend too much anyway. And the public know it. Denial and sophistry wont cut it.

    Labout needs to regain the initiative by proposing stability legislation and setting out exactly how it will restructure the banking sector.

  2. Tom Mein says:

    Why not go back to 2002 and show that labour were overspending from there?
    You cannot say that the opposition were wrong when things were going well and then suddenly try to claim that the opposition were agreeing with your policies when suddenly tax revenues dry up.
    If labour had been running a surplus since 2002 then we would not be in the mess that we are now.

  3. Anthony,

    I’m not sure it was the risk that was the problem more the hubris coupled with a strange belief that the capitalism had been entirely tamed…


  4. Gary- I think we’re basically in agreement and for reasons that Duncan explains in his (very good) blog. Labour was running a current deficit in the context on an economy where there was not an output gap- in fact the economy was above its productive potential according to some estimates:

    See p. 20 of ‘Inflation and the output gap’ published by Hm Treasury in March 2010:

    What I would say is that the risk means it was spending too much/ taxing too little. There was an overspend also but it wasn’t catastrophic until…… Table 1.1. above shows how little scenario planning there was. I have to say that this is one thing the OBR have improved with their ‘fan graphs’- at least we are now looking at a range. How the Budgetary process adapts to that if at all will be interesting. Personally, I think a risk assessment should be attached to every Budget report- with a quantification and planned response to a series of risks.

    Tom- you are right that Labour is responsible for its policies of course. However, the opposition parties were in accord and so, at the very least, their judgement comes into question also.

  5. David Gould says:

    Interesting variation on the desperate quest to exonerate Labour, that they weren’t spending beyond our means and wasting most of our money.

    Labour inherited an incredibly stong economy with a relatively efficient state in 1997. They repaid much of the national debt by 2000 and, with the help of the independent Bank of England and Keynesian spending managed to avoid the dotcom recession. I was actually impressed.

    Unfortunately, rather than consolidate after that, spending spiralled for another 6 years with most of it wasted. Undoubtedly, this all crowded out the private sector (that bit of the economy that pays for the state).

    When the credit crunch hit and the private sector made cutbacks, Labour and the BoE were slow to react, both presumably in denial (“no more boom and bust”).

    A bit earlier, they might have been justified in the humongous deficit spending which has caused the current crisis. But Darling chose an ineffective and hugely expensive stimulus (cutting VAT) which was too late anyway, no-one took any notice and we went into a massive recession nonetheless. Tax intake dropped like a stone as businesses folded, unemployment rose etc.

    Labour must also take some responsibility for the joke that was the FSA’s regulatation. Everyone in the country knew that the housing market was booming unsustainably but the Govt did nothing.

    One slight mitigating factor is that the Tories would probably have done nothing too. We’d have had the same boom but with lower spending, a smaller contraction and smaller recession.

    But we’d still have houses being maybe 75% overpriced, banks needing yet more bailouts if the housing market crashes, a still horrific debt and deficit, debt interest about to triple, inflation on verge of spiralling, a truly scary pensions gap, a carbon economy which is threatening our very survival and no independent BoE.

    I think we owe it to ourselves and the next generation to be honest about mistakes made and find out how to survive the next financial catastrophe.

  6. David- I think you’ve completely misread the argument of this article. It’s not an ‘exoneration’ at all.

  7. Dear Anthony,

    If I’m reading you right, your table merely shows that there was no provision for the crisis in the predicted figures. Is that right?

    If so, I wonder, what would have counted as responsible? Should Labour (and the other parties) have predicted a downturn of 1930s proportions?

    Should Labour (and the other parties) have planned for the downturn to hit in 2008, or some other date?

    Should Labour have hedged against sudden disaster and radically shrunk the state just in case? (Wouldn’t this have been somewhat extraordinary and in itself potentially destabilizing, provoking the very thing it was hedging against?)

    Should Labour, then, have anticipated a modest downturn, to come at some point in the following five years, and planned spending accordingly? The answer to that, given a lot of rumbling post 2005, is probably yes.

    What would that have looked like, in terms of a) defict and b) total debt?

    a) maybe it would have been good to have run a surplus. But people talk about surpluses as if they are a commonplace. They are fantastically rare. Looking at the figures from the 1960s onwards I can’t see any years when the UK ran a surplus, EXCEPT: 1990, 1991 (Tory) and 1999, 2000, 2001 (Labour).

    Realistically, how many years of surplus can we ask the last Labour government to have run?

    A better measure, surely, would be scale of any deficit. Here are deficits for the ten years up 1997. (Source Treasury PSF9)

    1986/87 2.04% of GDP
    1987/88 1.00
    1988/89 ?1.29
    1989/90 ?0.19
    1990/91 1.01
    1991/92 3.73
    1992/93 7.44
    1993/94 7.67
    1994/95 6.15
    1995/96 4.67
    1996/97 3.42

    And here are the deficit numbers for the decade after Labour took power.

    1997/98 0.68% of GDP
    1998/99 ?0.50
    1999/00 ?1.64
    2000/01 ?1.85
    2001/02 ?0.02
    2002/03 2.30
    2003/04 2.85
    2004/05 3.28
    2005/06 2.94
    2006/07 2.29
    2007/08 2.35

    The Labour numbers look a whole heap better to me than the Tory numbers. Indeed the simple average deficit for the Tory decade is 3.4%. The average Labour deficit across the decade is just 1.0%.

    In this context I don’t see the 2.2%/2.3% figures for 2007 and 2008 equating to anything like “driving without insurance” (a hanging offence, in my book).

    Indeed 2.3% in 2007/8 is still lower than the AVERAGE Tory deficit of the previous decade! What size of deficit are we really expecting Labour to have been running? What would a more prudent ten-year run really have looked like?

    b) In terms of total debt, the exposure to risk also seems reasonable and relatively cautious.

    Here are the figures for both decades.

    1987/88 36.6% of GDP
    1988/89 30.4
    1989/90 27.5
    1990/91 26.0
    1991/92 27.2
    1992/93 31.4
    1993/94 36.5
    1994/95 40.1
    1995/96 41.9
    1996/97 42.5

    1997/98 40.6% of GDP
    1998/99 38.4
    1999/00 35.6
    2000/01 30.7
    2001/02 29.7
    2002/03 30.8
    2003/04 32.1
    2004/05 34.0
    2005/06 35.3
    2006/07 35.9
    2007/08 36.5

    These are not irresponsible numbers. Total debt under the Tories was 42.5% when Labour came to power. In 2007/8 it was 36.5%. Again, what would a more prudent decade have looked like; what size of national debt are we really asking Labour to have hit in 2008?

    I think you agree these numbers do not indicate imprudence, but you seem to accept the idea that Labour is still to blame for not taking evasive action sooner.

    I think for this idea to really hold water, it needs to be spelt out exactly what would have been expected, REALISTICALLY, of any government in power at the time.

    I fear we are judging the Labour years according to ridiculously high standards. Asking them to have run a surplus (despite the need to restore public services after chronic underspending) for more years than they did strikes me as extraordinary.

    Asking them to have foreseen the scale (and timing) of the global crisis is also so unfair it verges on the absurd.

    I am not blind to Labour failings, but I do think we are all in danger of subliminally accepting the Tory rewriting of history, judging Labour’s economic record through the polluted prism of Tory rhetoric.

    We expected the last Labour government to drive the car so much more smoothly and prudently than its predecessors in modern history – and the numbers above show that it did.

    We expected the last government to give a lot more people a lift to work in that same car – and it did.

    We now expect the last government to have seen the earthquake round the corner… to have bought some special earthquake insurance just before the bend. And it didn’t.

  8. Thank you Dominic. My simple answer to that is that Labour should have- as a baseline- run a fiscal policy that met the economic situation of the time. Let’s put capital investment to one side as that is a different issue (and, in my view, the national accounts/fiscal targets should treat this in a very different way matching investment to future earnings. i.e. tax, as a business would do.)

    Important here is the chart on p.20:

    What is shows is that the economy was running at or above capacity. In such circumstances, one would have expected a surplus on current spending as a baseline prudent policy. But Labour was running a deficit on current expenditure even before the crash. Now was this the ’cause’ of a £155billion deficit? No it wasn’t but it meant that the UK started in an fiscal position £10billion+ worse than it should have been. Why was this happening? Two reasons in my view: fiscal decisions had become entwined with political timetables and a proper assessment of the risk to economic growth had not been undertaken (though the crash of the wave was greater than anybody would have predicted admittedly.)

    I would add all the caveats that Duncan mentioned. It is good to see today that the narrative is shifting on this to acknowledgment of some error. Though I still think it’s in the ‘we didn’t explain things properly’ territory rather than ‘we made mistakes’ territory.

    And whatever we say, the public has accepted the Coalition line that this is Labour’s deficit alone (v Coalition’s alone) by a margin of two to one.

    It will be politically difficult but a more nuanced position based on a honest reflection may at least make a case about the future that will be heard a bit further down the line? In fact, we can reflect on our fallibility in a way that you are unable to reflect on yours could play quite well over time.

  9. Thanks Anthony.

    I really fear the nuanced position is impossible and suicidal.

    Another way to think about this is: if Labour had an absolutely PERFECT record, would it be strategically clever to run the “we don’t mind being fallible” line anyway? I’m open to all strategy, but in my bones it feels like madness.

    No record is in fact perfect, but it’s hard to imagine a better one, unless you look really hard, as you have done, and even then you’re finding – in a £10bn or so gap – only the equivalent of Dad dropping a tenner on the way home. That’s not why the family is being evicted, and Dad confessing to having lost the tenner is a weird message.

    Where I think I do agree with you is in the possible viability of a longer term “we can be grown up about our fallibility” strategy. In the long term, and Ed is quite well-placed for this, Labour could adopt a straighter-talking, more humble, more honest tone. It would be a massive risk. It could only be done as a whole strategy (not piecemeal, not now, not just on the economy). It would be an anti-spin strategy.

    This ‘fresher way of talking to people’ struck a chord for the LibDems at the election. They may well have blown that for all parties for a generation. But the public wanted that, respected it as a notion. I wouldn’t object to a brave leader trying, despite our political culture and our horrible media, to be more frank in his discourse.

    In that context, mistakes could be acknowledged. But not this one. I admired Gordon Alexander on Newsnight last night, but note how he could not apologize for Phil Woolas’s actions for fear of rebound. If that apology would have been dangerous, how much more so, in this climate, would an apparent (and/but qualified) apology on the economy look?

    Looks like Ed is going to try the humility strategy, so we will see if it works. I’m dreading it!

  10. David Gould says:

    Dominic: “These are not irresponsible numbers.”

    You are comparing one set of irresponsible numbers to another. Any deficit spending when recession isn’t immediately threatening is irresponsible.

    Secondly, you also have to look at what the money was spent on. We know that productivity in the NHS (in spite of medical advancement) has slumped. We know that universities are having to run remedial classes for undereducated new graduates.

    The Tories wasted a lot of our money (Eurofighter being the main example) but it was nothing compared to Labour.

    We need to get rid of this idea that spending = investment. Investment implies a good return. Everything else is either a gamble or a waste.

  11. I meant Douglas Alexander above.

    David: “Any deficit spending when recession isn’t immediately threatening is irresponsible.”

    If that is true then all governments are irresponsible. I guess you’d be right when you say I’m comparing one set of irresponsible numbers with another. Mind you, Labour was less irresponsible than others!

    Yes of course it matters what money is spent on. Productivity when expanding usually falls even in efficient organisations, so I’m not too upset about that in the case of the NHS. The NHS is an unruly beast. I’m sure it is wasteful. But I still want an NHS in preference to alternatives, so I’ll live with the downsides of funding it.

    Did I say spending = investment? Not sure it is or should be. Some spending will produce no return. Most public activity does not yield a straightforward return which is why it is done by the state and not the private sector. Often we can identify and quantify a public good, and measure “returns” that way. Sometimes we can’t even ascribe an artificial value to our activities – even then, that doesn’t automatically make them a waste. But they may indulge our sense of decency, like a memorial to war dead, or our cultural heritage, like the old-fashioned street signs in Dulwich where I live. Quite happy for my taxes to go on that stuff.

  12. David Gould says:

    Agree with all that, Dominic.

    I’m inclined to think that overall spending should be capped by an independent body, either the BoE or the OBR. Otherwise, it’s guaranteed to be used to bribe the electorate… with their own money.

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