(On 14 January 2011, the IPPR published a paper by Tony Dolphin, Senior Economist and Associate Director for Economic Policy at the IPPR entitled Debts and Deficits: How much is Labour to blame?)
Tony Dolphin makes a key point in his paper, that Labour did not seem to realise how much it was relying on revenues from sources associated with rampant lending, such as the City and the housing market.
Unfortunately, he doesn’t develop this point.
Using the Treasury figures for the budget deficit, between 2007 and 2009, the deficit leapt from £37bn to £123bn. These figures are cyclically adjusted, so they already take into account less income tax and VAT revenues, and higher spending on unemployment benefits.
It would have been useful if the IPPR had tried to put detailed numbers on the reasons for that dramatic increase in the deficit. How much was this because the recession did permanent damage to sustainable economic activity, and how much of it was because of the end of a debt-fuelled bubble?
If the IPPR won’t do it, perhaps another body will,because this is an extremely important question.
If the reason for the vast structural deficit is because the government was making long-term spending commitments on the basis of a windfall from temporary bubble-related revenues, then this isn’t just of historical interest.
The economic statistics prior to 2009 did not warn us of a hidden structural deficit. We need to be assured that the methodology that the OBR is using will warn us if this happens again.
And, if a large part of the growth prior to 2009 was based on rampant lending, then we need to be warned of that. So that governments will find it harder to pump up a bubble just before an election, and claim this as sustainable growth.
Aside from that important point, I found Tony Dolphin’s piece disappointing. He repeats, among others, the standard Labour claim that Labour had a lower deficit in 2007-8 than it inherited from the Conservatives in 1997.
While factually true, this is political spin. Tony Dolphin is not comparing like with like.
In 1997, the UK had a deficit on a firm downward trajectory, so that, when Labour followed the Conservative spending plans, within two years they were running budget surpluses. In 2007-8, unsustainable spending was rising rapidly. When the recession punctured the bubble, revenues from sources associated with rampant lending disappeared, and the deficit leapt to a peacetime record. If he compares the deficit in 1997 with that in 2010, when the coalition took over, the statistics tell a very different story.
This sort of spin is understandable from politicians. From a think-tank, it is worrying, because it implies that there is some kind of group-think in Labour-leaning circles. That they are refusing to acknowledge what really happened.
For Liberal Democrats, this matters. It is in our interests for Labour to put behind it the mistakes of the Brown years, and re-establish its economic credentials. Otherwise, I fear, after 2015, we are in for a decade of Conservative majority government.
For the country, this matters. Because, if Labour refuse to accept the mistakes of the past, their opposition will inevitably take the form of popularism, aimed at stoking up anger at deficit reduction, rather than in offering a coherent alternative.
Irrespective of who wins in 2015, the social cohesion of the country is important.
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26 Comments
Someone wrote a song about it: http://www.youtube.com/watch?v=2g5Hz17C4is
One thing I’d like to know is how much of the deficit in 2008 and 2009 was down to bailing out the banks, and why the deficit did not come down sharply once those one-off payments had been made.
So the thinktank don’t say what you want, so you kind of put words in their mouth and then anyway rubbish them for not saying what you want them to say?
*slow claps*
Interesting article with some important points.
I don’t think Dolphin’s comparison with 1997 is spin more a reference point in contrast to the tiresome and not wholly true ‘it’s all Labour’s fault’ line.
Labour were asleep at the wheel. It happened on their watch. So they must take their fair share of blame but at the time neither Tories nor Lib Dems were saying Labour is spending too much. If at the time we had then we could proceed with more honesty. I still have a collection of our leaflets which include criticisms for the lack of investment in x, y or z by Labour. There are important issues which need to be understood but the endless attempts to pin the issue on Labour overspending closes off that wider, more mature discussion.
In the desire of Clegg, Alexander and Laws to remould the party’s positioning they have closed off a role for the LD as honest brokers and leaders of a more thoughtful discussion on what went wrong. This is part of the damage caused by over partisan posturing. Labour does need to discuss where they went wrong, so do the Tories and so do the LDs. We can point to some things we feel we might have done better but our policies suggest that we would have spent at a similar level to Labour.
Your conclusion stumbles, George, because it just fizzles out into a ‘Labour must admit’ line. It would have been useful to sketch what you thought Labour might do, what the LDs must do and then consider whether those two trajectories are likely to be anywhere near each other.
@ Kilburnmat
Well it doesn’t sound like they said what you wanted them to say either. Labour still had a deficit in 2007/08 when it should have been running a surplus and was ramping up public spending massively, based on an unsustainable boom in revenues. It turned a blind eye to the problems because it didn’t want to know where the money came from or how. Pretty damned irresponsible.
@ Tabman
The deficit as it is being discussed here IS excluding the bail out – all 11.14% of GDP in 2009/10 of it.
Have a look at the link below to see some hard figures.
h ttp://www.statistics.gov.uk/pdfdir/psf0111.pdf
This is the whole problem isn’t it, before the banking crisis started the economy was doing ok, since the banking crisis continual political spin to blame Labour, even when it is quite obvious what the real problem was, spin for political gain was always going to happen, but I find it irritating when during the election propaganda was “putting the country first” which is quite hypocritical because who knows how much the negative political spin added to the depth of recession, without doubt it did have some influence.
The banking crisis was worldwide and yet Liberal Democrats and the Conservatives put the blame firmly at the feet of Labour, and once that was done for political gain, (there can be no other reason), you have backed into a corner then when a think tank gives a differing opinion you can only respond with…
“This sort of spin is understandable from politicians. From a think-tank, it is worrying, because it implies that there is some kind of group-think in Labour-leaning circles. That they are refusing to acknowledge what really happened. “
How about it is not spin and the reality is that the spin came from Liberal Democrats and the Conservatives, but I am sure there will be another think tank that will support the governments view.
George,
Unfortunately, you have posted previously to point out the crucial political importance of persuading the electorate to blame your opponents for any bad situation. You pointed out that Obama has been far too slow to blame Bush (although he has a good case for doing so), and you have argued that we should leave no stone unturned in pinning blame onto Labour (though on this side of the pond the case is a lot weaker, as AlexKN points out, since we were all making much the same mistakes).
Having read your previous postings, therefore, I’m afraid I just fall about laughing when you say things like “if Labour refuse to accept the mistakes of the past, their opposition will inevitably take the form of popularism,… rather than in offering a coherent alternative.” You have no interest whatsoever in helping Labour to offer a more coherent alternative. You just want them to damage their own political reputation and throw away their votes.
Well, in all conscience there are plenty of good reasons why we should distrust many Labour politicians, and campaign against them. But that shouldn’t mean that anything goes. Yes, devious spin-doctoring and relentless, dishonest blame-gaming can be horribly effective. But if you believe in political ideals, and you’re not just in it cynically for personal advantage, you shouldn’t touch that kind of campaigning with a bargepole.
I said this last year, but based on Brown’s “We have abolished boom and bust” rhetoric – implying he was basing long term spending plans on boomtime revenue.
And so the pain begins – politicomaniac.net/7v0
This study shows the same empirically. Well done to the IPPR and thanks to George for wading through the numbers for us!
@AlexKN
Bang on. This article seems a bit partisan to be honest.
I think we need to consider this: if the structural deficit has risen by nearly £100bn (I’m sceptical, people seem to think it is a real concept rather than a very uncertain estimate) then this is equivalent to the boost in the economy (there seems to have been no crowding out). Any thoughts on what shape the economy would be in without this stimulus?
@Kilburnmat, @Jim
My apologies. On re-reading my piece, I realise I haven’t properly described the IPPR.
They have strong ties with the Labour party. “The current director is Nick Pearce, a former Head of the No 10 Policy Unit and special advisor to David Blunkett MP. Former members of staff include Patricia Hewitt, David Miliband and Tristram Hunt.”
http://en.wikipedia.org/wiki/Institute_for_Public_Policy_Research
Perhaps, with that information, the tone of my piece makes a bit more sense. It’s also why I think the IPPR piece is potentially significant, because it may reflect the thinking going on behind closed doors in the Labour party.
Doubtless, you still disagree with my argument. And if there are flaws in it, please do point them out in detail.
@AlexKN
Thanks for a thoughtful response. And I agree with some of what you say.
Personally, I don’t single out Labour for blame for the financial crisis. I think this was a collective failure, both internationally, and across the UK parties. Vince Cable did warn about some things, but not everything. So we Lib Dems are also implicated.
You’re also right that we Lib Dems didn’t sufficiently warn about the dangers of deficit spending. There was some warning, but not enough. And rather than campaign on this, we tended to campaign for higher spending. But I don’t think it would be fair to put too much blame on the opposition parties. In our political system, it is not the expected role of the opposition to propose unpopular necessary action. Least of all for the third largest party.
If Labour had been ten years in opposition, the same would now apply to them. But, until the mess they passed on to the new government is sorted out, they’re not an opposition who can absolve themselves of responsibility.
Regarding Tony Dolphin. Perhaps I’ve been unfair in my article.
He does make an extremely important point when he talks about “relying on revenues from sources associated with rampant lending”. And perhaps he had to qualify that with points which, personally, I regard as political spin. Maybe otherwise the rightwing press might write stories about the Labour-leaning IPPR undermining Ed Balls.
I fear your suggestion of the LibDems “as honest brokers and leaders of a more thoughtful discussion”, is unrealistic while we are in government. That role will have to fall to more politically independent groups, perhaps the IFS, the OBR, maybe the BBC.
Your question, what do I think Labour should do, is a good one. And I’ll try to answer it.
I don’t think, realistically, Labour could do a massive mea culpa, particularly as Ed Miliband was one of Gordon Brown’s lieutenants.
It seems to me that Labour had two political strategies.
The could adopt the Darling plan, and make a big issue out of supporting certain carefully chosen cuts, and so get strongly into the public consciousness that they are not denying that tough action is necessary. And then they campaign on carefully selected specific cuts that they disagree with, as well as attacking the pace of the cuts. This is, I think, the strategy that David Miliband would have chosen.
For me, in the Labour leadership campaign, the defining moment was in the leadership debate, when Andy Burnham suggested a strategy like the above and said that there would have been painful cuts under Labour. Ed Balls responded with something like “we shouldn’t do the government’s job for them”.
While I’m not completely clear on Ed Miliband’s strategy, it seems to me that Labour are now adopting this alternative Ed Balls approach: they say they would deal with the deficit by using growth, refuse to specify any cuts, and downplay the suggestion that there would have been pain under Labour.
Personally, I think this approach is a political disaster for Labour. They’ll pile up mid-term protest votes, and as they do so, they’ll be steadily undermining their reputation as a party that can take tough decisions. Labour took from the mid-eighties to 1997 to restore their reputation for economic competence. I think they’re repeating the mistake.
I’ve read one or two say, “Good. That’ll give the Lib Dems a chance to surplant them as the main opposition in the 2015-2020 parliament.” But I lived through the eighties, when Labour were too weak to defeat the Tories, but strong enough to prevent us becoming the opposition. I don’t want a repeat of that.
As to my remark about “stoking up anger at deficit reduction”, I was thinking of a comment by one of the major donors who has recently stopped giving money to the Labour party. He regarded the Ed Balls strategy as irresponsible. I forget his exact words, but they were something like “stoking up anger at deficit reduction”.
@David Allen
I’m sorry. We’ve discussed this at length previously, and I seem to have totally failed to explain my point of view. I believe that, while the international crisis was the cause of a chunk of the deficit, Labour are respsonsible for the rest. Believing Labour are wrong to place almost the entire blame on the international crisis, I have a right to communicate what I think is true.
You disagree. You appear to think almost the entire blame should be put on the international crisis. You’re entitled to your opinion. I’m entitled to mine. Just because I think you’re mistaken, I am not accusing you of dishonest blame-gaming. I’m sorry you can’t reciprocate.
There are numerous respected economists Richard Koo, David Blanchflower, Joseph Stiglitz who thing you are wrong on the deficit. You really have fallen for Osborne’s voodoo economics They want to play out Thatcher’s Gotterdamerung and smash the state and you have fallen for it ( well Laws believes in it ) I feel sorry for you , a lot of excellent socially conscious Lib Dems are going to pay for it. ( after the poor, youth, public sector workers, the health service, northerners of course). A few more like Oakshott, you may be able to salvage something.
But where are the Lib Dems pushing for an alternative economic system?
Banking is a service to the real economy, not an industry in itself.
The arguement seems to be around the levels of taxation that should be levied on banking profits rather than the fundamental question of why is banking so profitable?
Our economy is managed based on assumptions about capitalism that just don’t hold true in the real world. For example where excess profits are being made then competition should spring up and those profits should go down to normal levels. The fact this doesn’t happen in banking shows that it is not a free market and the government should intervene to ensure false excess profits are not made at our expense.
There are very simple solutions that would benefit the public at the expense of bank profits.
1. The creation of a state owned central bank which is the only bank to be backed by the tax payer.
2. The state owned bank issues the currency of the nation, if banks want to issue credit to customers they borrow real money from the state bank and are responsible for paying it back.
3. Investment banks are unregulated except they can only gamble with real money and if they lose, they lose.
This ends the state subsidy of the banking industry and turns the monopolistic parts of banking (creating money and credit) to the public rather than to private companies. Banks could then be judged on their ability to allocate capital effectively and investment banks on their ability to maximise the return for their customers. In other words a free market to benefit the many not the few.
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Many Liberal Democrats increasing see the emphasis on the deficit as a smokescreen for the Government to make excessive cuts to local services – our MP’s need to start to stand up to government cuts that unfairly single out local government and against policies like the Localism Bill that potentially take more powers back to the centre. Without local control of our finances any local government cut is just as much the responsibility of Eric Pickles as of the local council.
@Mr Voice
“what goes too far – for example – is raising the same topic in several threads in quick succession.”
Gotcha. I don’t like it when Lib Dems campaign dishonestly about economic policy:
https://www.libdemvoice.org/what-the-think-tanks-are-saying-the-ippr-on-how-much-is-labour-to-blame-22996.html#comment-164754
And I don’t like it when they let Cameron get away with pandering to racism:
https://www.libdemvoice.org/meral-husseinece-writes-has-multiculturalism-failed-22992.html#comment-164749
And I don’t like to see Clegg featured as a leader of the Conservative revival:
https://www.libdemvoice.org/back-from-the-brink-the-extraordinary-fall-and-rise-of-the-conservative-party-22766.html#comment-164756
And Mr Voice is far too nervous about the parlous position of our party to want to let me make all these points on the same day.
Well, in our bonfire of principles, let’s forget about free speech, eh?
@George Kendall who ststed: In our political system, it is not the expected role of the opposition to propose unpopular necessary action.
I actually agree with you on that so why do LibDem and Tory MPs continually do so with their braying for Labour’s detailed cuts. You can’t just use the bits that suit you if you wish your arguments to be regarded as balanced.
@Simon Hicks who said: Many Liberal Democrats increasing see the emphasis on the deficit as a smokescreen for the Government to make excessive cuts to local services
The public figured that out quite a while ago and that’s why they have switched off on the mantra it was all Labour’s fault. The public know Labour got things wrong but they also know the Tories propped up by the LibDems are doing it with intent as opposed to Labour making mistakes.
Why do you think you’re being tanked in opinion polls?
David Allen. Your comments across many threads and times can be summarised as “I don’t like Nick Clegg.” We’ve got the message. Really.
EcoJon – Labour’s current “critique” amounts to little more than an imitation of te Harry Enfield character who’s catch phrase was “you don’t wanna do it like that”, to which the obvious answer is “well how would you do it then?”
@George Kendall
Thanks for your detailed reply to my comments. I am not sure how Labour will work out their policy. I assume it will partly flow from whether the economy picks up or we remain stuck in some variant or stagflation, jobless recovery, very slow recovery etc.
However I am more concerned about the LD policy. I would suggest that the actual policy not the deviation led by Laws, Alexander and Clegg is probably very close to the public mood. Global crisis/ Labour should have been more careful/cuts too fast, too deep/bankers need to do more. That was our policy in May 2010 and whilst abandoned by the leadership it still reflects the views of most LDs I know. Surely the party needs to find a way of articulating that and building on that for the next election. If it stays lashed to Osborne I would suggest it will gain little of any success but receive disproportionate blame for a faltering recovery.
@AlexKN
I think the letter to The Times by LibDem councillors is the real start of the fight-back for LibDem Party Policies and I think the Too Fast Too Deep message clearly shows that.
The only way to stop the rightward plunge of LibDem MPs is to have a Party that is clear about their policies and be prepared to deselect MPs who want to be Tories anyway IMHO.
George Kendall,
Now you’re wavering a bit, you know. Having posted hardline stuff about “if Labour refuse to accept the mistakes of the past”, you have now posted softer stuff like “Personally, I don’t single out Labour for blame”. Well, perhaps I should match you with a waver of my own. Whilst the bubble was an international phenomenon which almost everyone failed to recognise properly, I accept that the guys in charge should always bear the prime responsibility. The question is whether or not to make a big meal of all that. if we are out on the stump campaigning, a bit of knockabout slagging off Gordon Brown is fair game. If however we are making our own policy for the future, basing it on what kind of soundbite might hurt our opponents most is just a great way to get the policy wrong.
Some people see the deficit in ideological terms. Osborne makes it an inaliable core belief that the deficit and the size of the state must be cut. Balls is liable to make the opposite claim that only Keynesianism can ever be the right answer. I prefer to see the deficit in pragmatic terms. It’s more like the weather: sometimes you can largely ignore it, sometimes you need to worry like hell about it. Economists regularly throw their pet theory at an economic situation and find to their chagrin that things do not pan out the way they predicted. Why don’t they ever learn that they are dealing with a complex and unpredictable system, and that the right thing to do is, generally, to keep changing your mind, and do whatever appears to be working best at the moment?
Instead of that, we’re being ruled by the ideologists. We have Osborne and Clegg painting themseleves into a corner by declaring that big cuts are the only way to go and that anything else is soft degenerate Labourism. We also have Balls declaring that cuts are anathema under all circumstances whatever the bond markets might be doing. This does not help if circumstances change and the imprisoned ideological politician is unable to change his mind to deal with them!
@Ste Thomas
You’re right that there are numerous respected economists who think the deficit needs to be reduced more slowly (just as there are numerous respected economists who agree with the Coalition).
But the article by Tony Dolphin wasn’t about this, it was about the past. Whether specific policies of the previous government were partly responsible for the record peacetime deficit that we are now facing.
Of course, the past is very important in understanding the present and the future.
If I am right to argue that there was already a large, hidden deficit before the financial crisis hit, then this has numerous implications.
One is that, if deficit spending created this deficit crisis, is it sensible to repeat this policy to get out of it? Will deficit spending sufficiently stimulate economic activity that it will increase tax revenues enough to pay for the increased deficit spending?
I think that we should be very wary of taking Ed Balls advice on this, if it turns out that this self-same advice from the same self-same Ed Balls got us into the mess in the first place.
By the way, if you’ve a link to an article by someone like David Blanchflower explaining why the UK saw such an enormous increase in its cyclically adjusted deficit, I’d certainly be interested to read it.
@Timak
I wouldn’t go as far as you are suggesting, but I agree with need to think very hard about the causes of the financial crisis, and consider significant reform to reduce the risks in the future. I’m currently reading a book on the subject: http://www.theroadfromruin.com/
In it they support, for example, the idea of measuring happiness and not just GDP, they warn about not just toxic assets, but toxic ideas.
@Simon Hicks
I share your concern about cuts to local government. Especially that these have been front-loaded. In the long run, I would vbery much want to see local government its own funding locally, as far as that is possible.
@EcoJon “why do LibDem and Tory MPs continually do so with their braying for Labour’s detailed cuts?”
Because that’s standard practice. In the same way Labour complained about a lack of detail in Conservative policies. And remember the other thing I said: “If Labour had been ten years in opposition, the same would now apply to them. But, until the mess they passed on to the new government is sorted out, they’re not an opposition who can absolve themselves of responsibility.”
@AlexKN
My preference for Lib Dem strategy would be a nuanced distancing from a limited number of Coalition policies. Not disapproval, but caution. That would be a difficult trick to pull off without undermining coalition cohesion, and it might risk the thing that the UK needs above everything else at present: a stable government.
Of course, as I’m just a humble grass root, I’m free to say what I like. As you know, I’d prefer the deficit reduction to be spread over an addition year, there are some cuts to welfare I dislike, I think the health reforms are too rushed, etc.
But, important though these differences are, for me the most important issue is that the country needs stable government. While I dislike some of the coalition policies. Considering the dire budgetery situation, the previous government has left the country without the choice of avoiding painful and unpleasant measures. Whether that helps or harms the Lib Dems in the medium term, I don’t know. We’ll survive but maybe we’ll be damaged. But what matters is doing the right thing by the country.
@David Allen
I agree with you that for indviduals wavering is good, and changing your mind is good. But with regards to the government, I’m with the IFS. Governments which publicly waver undermine confidence. As new data appears to contradict their policies, they can and should have private doubts. But they need to steer a steady course, and only change once they are certain that is necessary.
Clearly Labour was, at some level, to blame for the crisis; they were the ones minding the shop and clearly didn’t understand how the economy works and in particular what they needed to regulate to prevent the whole show coming off the rails – as it eventually did.
But much the same is true of many bankers who were either remarkably ignorant about how banking works, about risk etc. (which is incompetent) or did understand but din’t care and were just looting the system confident that they could get out before the collapse (which is criminal). There was certainly a lot of the latter going on but either way they deserve no mercy from the Sovereign, and certainly not the bail-outs at taxpayer expense they have had.
The notion that it was “an international crisis, made in America (or wherever)” is an awfully convenient excuse for the political classes but wrong. It is true that much of the world fell into the pit at the same time so in that very limited sense it is indeed “international”, but why? What did the world’s highly paid bankers, politicians etc not understand or not want to understand that they didn’t see the pit? Many ordinary people sensed that something bad was coming down the track.
To find the answer we have to dig deeper than party politics and finger pointing (although there needs to be a lot of that done by judges in handing out stiff sentences, especially in the USA). The deeper culprit, I believe, is that a mistaken school of economics has gained the ascendency and cognitively captured the power elites of most of the world.
An airplane designer who did not believe in air resistance would soon see his creations crashing to ground; so it is with the financial system. The neo-liberal school of economics which has dominated the world for around three decades bears about as much connection to reality as creationism. Now it has failed and its failure is the root cause of the crash.
Unfortunately Cameron, Osborne and Clegg are included in the cognitive capture and are trying to reboot the old system which is dedicated to the pre-eminence of financial capital over people or anything else. The struggle we have is to put financial capital in its place and elevate industrial capital which creates jobs, opportunities and hope back in the driving seat.
@ George Kendall.As the past is the raison d’etre for you policy is the supposed past I would assume that each informs the other. The Lib Dem’s have joined heartily in with this its all labour’s fault business while trying to ignore the greatest financial crash since 1929, didn’t you notice ? I do believe the Tories were calling for less regulation, any comment ? You have swallowed the Osborne’s deficit plan without hesitation. Who knows the level of reduction which the markets would take ? You have fallen in with the most damaging to the social fabric. The gist of your post is you don’t know if the Osborne policy is right but you don’t like Ed Balls. From the left, the Blair/Brown years were a neoliberal catastrophe, now we are putting the cherry on the neoliberal cake. Tell me the Tories don’t have an agenda to corporatise every part of our public life ? Living in the North the idea that the private sector is going to replace all those public sector jobs is laughable. We’ve been through it before.
But this think tank (like most commentators and politicians) misses the main reason why we have millions of unemployed and underemployed. We have lost most of our industries. We have relied on “financial services” as a substitute for manufacturing. Our utilities have been privatised and passed into the foreign ownership that has no interest in the welfare of our population. Ironically, some of our privatised industries have been purchased by nationalised foreign companies. We have been taught to rely on rising house prices as a future source of personal wealth. In the face of this national decline, a bit of bank regulation or tinkering with interest rates makes little difference to the impoverished and insecure state of the British population.
@ George Kendall “One is that, if deficit spending created this deficit crisis, is it sensible to repeat this policy to get out of it? Will deficit spending sufficiently stimulate economic activity that it will increase tax revenues enough to pay for the increased deficit spending?”
The current policy didn’t work in the 1930’s, 1950’s or 1980’s, why on earth do people think it’s going to work now? Labour spend when they should cut, the Tories cut when they should spend, they are both as bad as each other and they both keep making the same mistakes, the current government are making the cut at the wrong time mistake, again!