Why Labour would gain from explaining why they overspent in Government

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May 18, 2015 by Paul Goldsmith



The candidates for the Labour Party leadership are already  organising themselves into two groups on Labour’s economic record when in Government. The two candidates who were in that government, Yvette Cooper and Andy Burnham, are far more assertive in defending that record, whereas Mary Creagh, Liz Kendall and Tristram Hunt are all prepared to admit that Labour entered the 2008 recession not financially prepared for it. Given it is very likely that when pollsters report on the actual reasons for how people voted in the 2015 election, a lack of trust in a Labour’s economic management will have been a major reason, it is vital that whoever wins works to win back that economic credibility. A starting place will be being able to properly explain how and why, after 16 years of consistent economic growth, with eleven of those in Government, we arrived at a natural point of any economic cycle (recession) running a structural deficit. 

A mistake that the Conservatives have made for the past few years is calling what happened between 2008 and 2010 “Labour’s recession”. To the extent that Labour were in Government when it happened, I suppose it has some traction. But all but the most partisan anti-Labour parts of the electorate know full well that it was a global financial recession that hit most if not all countries in the Western World. To the extent that it was Labour in charge of the financial regulation regime at the time, you could perhaps blame them for the part played by the UK’s banking system in the recession, but a quick look at the donors list to the Conservative Party will confirm why the Conservatives had no complaints about that regulation system before the crash. Economic cycles are cycles, they have booms and they have busts (back to that later) and just because you are in Government when the bust happens doesn’t mean you caused it. That we ended it with a fiscal deficit (government spending over tax revenue) of £168bn in 2010 when the Tories took over was down to what was regarded around the world as a necessary stimulus package led by Gordon Brown that may have stopped the recession turning into a depression. Bailing out the banks was also necessary given the interrelatedness of the financial system at the time too. The recession was certainly not caused by any overspending either. So,  calling it “Labour’s recession” is therefore a red herring, and allows Labour to escape the far more important allegation. 

That is that instead of ending the 16 years of continuous economic growth with a fiscal surplus, which would have allowed the stimulus to happen without causing such a massive budget deficit, and which would have also paid off some of the debt we had at the time, meaning our debt wouldn’t have been so large, Labour kept the spending taps on throughout that growth period so we went into the recession with a deficit. Economic growth allows you to ‘fix the roof whilst the sun is shining’ and that didn’t happen. John Maynard Keynes, often cited by Labour as a major influence on their economic policy, did not just call for stimulus during recessions, he also argued for less government spending during growth. This would make sure boom and bust were less likely, which would allow for stability and a reduction of fear of cyclical  unemployment. Labour under Tony Blair and Gordon Brown didn’t throttle back on that spending, they kept it going, partly because, in Brown’s words, they thought boom and bust had been abolished, and so we arrived at the recession in deficit, giving us less money to spend on the stimulus package needed, and leaving Liam Byrne, the Labour Treasury Secretary, to leave that Ill-fated message for his successor that “I’m afraid there is no money left.”

At the moment, Burnham and Cooper are trying all sorts of arguments against this. The weakest is that the Conservative party supported the Labour government’s spending plans at the time. They know full well that having lost three elections the Conservative Party were very much still in search of a way back at the time, and without access to the full financial records, they were far better off politically supporting the strategy of the party that was so dominant. It was no different from how Gordon Brown committed to following the Tory spending plans for two years should Labour get into government in 1997. It was no justification for Labour’s over spending,  doesn’t change the facts at all, and is therefore a weak argument.

The second argument Cooper and Burnham are using is that the deficit and debt were lower than other major countries around the world. Irrelevant, the other major countries hadn’t had 16 years of continuous economic growth, so the other countries had more reason to have a deficit. 

Far better would be to explain why the spending was necessary. After 18 years of Tory ideological underspending on the entire public reals, including schools, hospitals and infrastructure, the spending was needed. In fact, for the future of our country, it could be argued it was vital. Having committed to Tory spending plans for two years, Labour didn’t really have a mandate to start their rebuilding of the country until the 2001 election. So confident were the country with Labour’s economic record by 2002 that a decision to raise national insurance by 1% to fund the NHS was seen as popular, despite it being an openly stealthy way of raising tax having promised not rises in income tax. The next few years saw this spending increased, but it funded an amazing upgrade of schools and hospitals that provided educational and health spaces the country could be proud of again. This story should be told with more confidence, but it isn’t as it can’t be told without admitting that the overspending happened. 

It all depends on what you call “overspending”. If overspending is simply government spending that is higher than tax revenue,then yes, they overspent. But if your overspending has the long term aim of lifting our country’s productive capacity, if it is about education and healthcare that supports the equalisation  of opportunities  and chances to thrive for many more people than under the Tory government then that can’t be called overspending. 

Some have argued that the spending wasn’t just on schools, hospitals and infrastructure. We embarked on wars in Afghanistan and Iraq that cost us a lot of money. Also, the creation of a million public sector jobs could be argued to be a way to buy votes, given that if you work for the public sector you are more Iikely to have your job protected by Labour. The Private Eye section called “Guardian non-job of the week” used to highlight how far this went, with my particular favourite being “walking coordinators” for local councils, whose jobs were to “get people walking more”. It was, occasionally, beyond parody. 

Yet there is little doubt that much of what Labour “overspent” could legitimately be called ‘investment’ and will have long term benefits for our country. Some have argued that the next Labour leader needs to be someone who wasn’t on that overspending Labour government so they aren’t tarnished with that brush. But Cooper and Burnham can do a lot better against on that issue, and it is time they did so.

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