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Did New Labour spend too much?

Did New Labour spend too muchIt is not sufficient for big business to have secured an election victory and an overall Parliamentary majority for the Tory Party. It is also necessary to intervene in the Labour Party to ensure that its leadership also conforms to big business interests too.

This currently takes the form of candidates in the leadership contest being asked to declare that Labour ‘spent too much’ in the run-up into the Great Recession. Answering Yes to this question is effectively a loyalty oath to big business interests, a renunciation even of the social democratic vestige of economic policy under New Labour.

The question is economically illiterate. It is taken as axiomatic that if there was a deficit that spending must have been too high. But all deficits are composed of two items; spending and income. In the case of government that income arises mainly in the form of taxes. It does not follow from the existence of a deficit that the culprit must be spending.

The reality is that measured as a proportion of GDP New Labour spent less on average than Margaret Thatcher (as shown in Fig. 1 below), namely 41.5% of GDP. By comparison, under Thatcher government spending was 44.2%. In relation to the deficit, the taxation levels were also very different. Under New Labour taxation revenues were on average 37.5% of GDP. Under Thatcher taxation revenues amounted to 42.0% of GDP.

Fig.1 Government spending and revenues as a proportion of GDP

The argument that Labour spent too much has no factual basis whatsoever. The loyalty test of renouncing the ‘overspend’ is based on a complete fiction. In fact, because it was in thrall to neoliberal economics, it is clear that New Labour taxed too little.

Under New Labour the main rate of corporation tax on profits was cut from 34% to 28%. Taper relief on capital gains was introduced which cut the tax rate on capital gains (CGT) from 40% to 24%. This system was later scrapped and the rate cut to 18% by Alistair Darling. Owners of assets therefore paid a far lower tax rate than the tax on workers’ income. A system was also introduced where, almost uniquely in advanced economies, companies could set off both past losses against corporation tax, and carry back losses to reduced their tax bill too.

None of this led to an increase in productive investment, which was the supposed reason for these huge giveaways to capital. Instead there was a very substantial increase in speculative investment, which did contribute to the crash. On the contrary, investment (Gross Fixed Capital Formation, GFCF) continued its long-term decline, as shown in Fig.2 below.

Fig. 2 Investment decline as a proportion of GDP

The effect of boosting speculative investment is indicated by the growth of housing as a component of the pre-crash British economic expansion. Fig. 3 below shows the level of GFCF and the level of productive investment, that is GFCF omitting housing. This clearly shows that the decline in productive investment was uninterrupted throughout the period of New Labour as well as before and since under the Tories. In this entire period economic policy was neoliberal dominance which meant there was an explicit aim of reducing taxes on business in order to increase investment. The policy was a complete failure.

Fig. 3 Investment and productive (non-housing) investment

The trend towards lower productive investment by the private sector and increased speculative activity was also fostered by the government’s cuts to the level of public sector investment. The data and OBR projections are shown in Fig.4 below. As government is the biggest single purchaser of goods and services in the economy, cutting government investment encourages the private sector to cut its own investment.

It is one of the central myths of neoliberal economics that government investment ‘crowds out’ private sector investment. The opposite was the case; a cut in government investment accompanied declining productive investment by the private sector. By contrast, rhe temporary rise in public sector investment in 2008 and 2009 helped to lift the economy out of recession and was rapidly ended by the last Coalition government.

Fig.4 Public sector investment
Source: OBR

New Labour did not spend too much. It taxed and spent too little, less than Thatcher. Worse, the cuts in taxes for the business sector and the owners of assets did not lead to increased investment. Investment fell and was itself exacerbated by the decline in public sector investment.

Defence of these simple facts has been made an acid test. They are actually the vestiges of social democratic economic policy at the level of the Labour leadership. If it is accepted that Labour ‘spent too much’, big business interests will have rewritten history in its own interests and fundamentally undermined the character of the Labour Party.

This article first appeared at Socialist Economic Bulletin

22 Comments

  1. who is asking the question and in what forums?

    As far as I know the candidates have not been announced and the deadline is June 9th

    Trevor Fisher

  2. Dave Walsh says:

    Excellent analysis, now take your graphs and put them into a sentence that the public can understand, because right now, the electoral meme is that Labour spent too much and it is such a powerful meme that the only time it will fade to black will be when the Tories screw up. You can’t give every canvasser an I-Pad with graphs on it. Deal with it. We lost, because the public thought Labour spent too much and idiot Ed didn’t come out of that particular corner fighting. What’s next?

    1. J.P. Craig-Weston says:

      Labors, (Blair’s,) unsustainable spending was actually an example, and a classic one, and was financed on the back of, an unprecedented financial bubble; which was fine whilst it lasted but has proved ultimately catastrophic when Blair attempted to sustain and prolong it, by selling off state assets and mortgaging government future revues to the private sector.

      Enjoyable as all this is, (not least because it serves once again to illustrate just how far up their own rectums Labor people now are,) it was a Labor chancellor who claimed and more frighteningly still seemed to actually believe it; that he’d ended the economic cycle?

      When nothing could have been further from reality.

      So what price really all your graphs, histograms and such erudite economic analysis?

    2. Mukkinese says:

      The accusation will not go away though. It will be made again and again and we need an answer.

      I think the above is probably to complicated an argument, but we must sort one out or suffer from this lie again…

  3. swatantra says:

    The cry is ‘We want xxxxx; when do we want it , Now!’
    Unfortuntely money does grow on trees, and, we can’t keep throwing money at a problem, hoping that will be the solution. Often the underlying causes remain. ask yourself, have the circumstances of the poor materially changed? Probably not. The solution lies in the redistribution of wealth to the deserving. I other words Taxation, and moving away from the cradle to the grave mentality and introducing the concept of self responsibility, and not blaming others for the cause of your misfortunes.
    Balls practically admitted that they’d spent a bit too much, and there’s very little to show for it.

    1. Robert says:

      Go for it Swat….

    2. Mukkinese says:

      What a load of silly rightwing dogma.

      Redistribution is always clumsy and inefficient, but it must be done from time to time or we end up with such massive inequality gaps that it ends in revolution.

      This “personal responsibility” claptrap would be fine if the right delivered jobs that paid enough to live on, but as the OBR pointed out the benefits cap will be busted this year right in the middles of a so-called “Jobs miracle”.

      What we need in order to reduce benefits are jobs that pay a fair day’s wage for a fair day’s work and affordable housing.

      Simply making life worse for people in bad situations is not “tough love” it is sadism.

      As the LSE pointed out recently almost all the money saved from the benefits cuts went on tax cuts for the rich, not to “pay down the deficit”…

  4. Barry Ewart says:

    Excellent piece as usual from Michael.
    What exasperated many of us was Labour Leaders failing to counter the charge that it was Labour that was to blame for the financial mess.
    As historical evidence shows it was the banks (see Lehman Bros, Fannie Mae, Freddie Mac et al and sub prime lending in the US) and unfortunately for the Tories history kept throwing up more evidence (JP Morgan Chase fined 13b dollars in the US in 2013 for their role in sub prime lending, City Group fined £4b in July 2014) so Labour had an open goal and for some unexplicable reason even failed to try to shoot!
    I even said on social media that Govts biggest calls are war, or a potential bank collapse – there could have been public panic and possible food riots outside of supermarkets as cash machines froze and people were denied access to wages, pensions, benefits and savings, but Labour answered the BIG CALL and what did they say on this – not a dickie bird!
    Oh and my voice was drowned out on social media as the Tories had hired a US Democrat to flood social media to counter criticisms of the Tories, I thought there was something odd about all these comments from ”Dave’ ‘George’ and ‘Mike’ et al.
    Labour is perhaps like a football team that ignores its fans (grassroots members) and the top down Manager picks his mates to play because they went to the same school whilst the fans and potential stars burst with talent, ideas, analysis and vision.
    We need to get power back to the grassroots and to free ourselves from the Neo-Liberal straight jacket!

    1. J.P. Craig-Weston says:

      Oddly enough I find myself in almost complete agreement with almost everything you’ve written.

      Well put.

      Unfortunately and once again it was Blair who introduced this; Labor have become heavily dependent on using hired rent-a-thugs to keep those very same, ” grassroots,” and our, “nutter,” opinions as far from the upper echelons of the hierarchy as possible.

  5. J.P. Craig-Weston says:

    Interesting post that touches on some of the increasingly obvious failures and deficiencies of the post Blair, Neolibral, Labor party.

    I wasn’t going to comment for a few days not least because some of the comment’s posted in response to my recent comments have been a little intemperate, (apparently to at least one commentator here “I sound like a right nutter.”)

    Like that’s somehow a bad thing?

    But in the light of recent speculation that, “Now we are presented with the possible reality that the SNP might indeed be a covert Tory operation,” which may actually have far more truth in it than many people might want to immediately acknowledge.

    The Italian Christian Democratic Party is infamous for having been funded, (and this is documented and fully acknowledged by the Americans and is even taught as modern history,) and supported by the CIA for decades; as a counter force to the strength of the often militant and often communist post war Italian labor movement.

    The SNP very may well and similarly be cooperating with undesirable and equally undemocratic influences, (not necessarily the CIA directly,) under similar auspices to obtain finance and support; in order to curb and contain the kind of traditional militant Scottish socialism that is anathema to American business.

    If at first this sounds like just more crackpot conspiracy theory, it really isn’t.

    But then we need also to look at a British Labor party, (where even word, “Socialism,” has been quietly deleted from the lexicon and replaced by the almost meaningless term, “Progress,”) and where you can now hire an MP as you would a London Taxi; a party now anything but, “socialist,” led by an, (yet another,) American educated, multi millionaire, (property speculator,) and his merchant banker brother etc and ask ourselves seriously if, (and at the risk of sounding like, “a right nutter,” again,) if exactly the the same thing hasn’t already happened to the Labor party, post Blair as well ?

    The current Tory, (and Labor,) policy of selling off all of this country’s revenue generating assets, (to various American corporations,) to be leased back to us at a price we probably can’t afford; is very much consistent with American foreign and economic policy, (being dictated by the American controlled World Bank and by the American controlled IMF,) and will be all too familiar to those countries already within the American sphere of influence or even Indonesia, Jamaica, even Iraq and Greece, (where currently their government is being blackmailed into flogging off their ports etc and curtailing their social programs.)

    In south America in particular, the same people and financial operators, (McKinsey and others like them,) were traditionally called, “Money Doctors,” which sounds fairly innocuous; but what they really are, are corporate asset strippers operating at the level of national government.

    But the, “peasants,” awoke in Cuba; and more recently in Venezuela and now in Greece and to some extent in Spain as well.

    In the UK there are probably still too many people too politically uncommitted or who just feel they have too much to lose, (or who simply don’t care,) but that can always change and sometimes in the wink of an eye.

    Personally I still continue to hope for the best, (if too often through gritted teeth.)

  6. J.P. Craig-Weston says:

    Meanwhile back in wonderful Neoliberal America, another day another atrocity seems increasingly to be the rule:

    http://www.chicagotribune.com/news/local/breaking/ct-chicago-shootings-violence-20150522-story.html

    Or this, which in it’s own way tell it’s own story about the current state of the US:

    http://espn.go.com/mlb/story/_/id/12781465/baltimore-orioles-chicago-white-sox-series-finale-played-wednesday-closed-public

  7. David Pavett says:

    Yes, ‘did Labour spend too much?’ is the wrong question and frames the wrong debate.

    We should hear from candidates on what basis they think economic performance should be analysed. Do they think that economists like Stiglitz and Krugman are right? Indeed do they know anything they would care to defend about economic theory at all. Or do they think that a national economy can be analysed like a household budget in the manner of the most ignorant politicians.

    I would also don’t want to hear any more about what is “pro-business” and what is not. I would like to hear them talk about what private enterprise can do well and what it can’t (e.g. run the railways or the health service). In other words can any of the candidates to leadership of what claims to be a “democratic socialist party” which wants to create a society in which “wealth, power and opportunity are in the hands of the many and not the few” tell us what they think the limits of capitalist enterprise are and where they think public enterprise is more appropriate?

    1. J.P. Craig-Weston says:

      Again another good post with which I find myself largely in agreement.

      Your days in the Labor party must surely be numbered.

  8. its important not to get intellectual. Most people think in terms of the household budget. Even here the idea a government should not borrow is bananas, what is a mortgage

    So the real issue is why Labour got trapped into the deficit issue when it was a blue herring.

    trevor fisher.

    1. Robert says:

      Hell a Blue herring with two parties fishing in the same Blue sea. The Tories and Blue labour.

    2. David Pavett says:

      “It is important not to get intellectual. Most people think in terms of the household budget”.

      Really?

      This is like arguing that the we see the sun go round the earth so it is important not to get intellectual about claims that this appearance might hide the reality that in fact the earth orbits the sun. As Trevor might well appreciate, arguing from within a given paradigm of thought without a critique of its basic assumptions may well condemn one to an interminable cycle of bad ideas based on a fundamental misconception. The important thing is to realise that it is the paradigm itself that needs to be challenged and that this is something that Labour failed to do in concept and in practice.

    3. David Pavett says:

      No, on the contrary, it is important to “get intellectual” since the shortest path to understanding reality is by a critical appreciation of the theories that attempt to explain it. If you rely on experience, direct perception, or “common sense” then you can be sure that you will never get to grips with the issues.

      Anti-intellectualism is one of the most unattractive and most unhelpful features of the British labour movement.

      1. David Ellis says:

        Indeed. Even the Oxbridge educated left thinker Owen Jones greeted the election debacle with a `don’t mourn, organise’ slogan when what was required was deep mourning and serious thinking. Of course organising is important but why and what for even more so.

  9. Mukkinese says:

    The only way I can see to fight this lie is not on answering the question; “Did Labour spend too much”, with yes or no.

    When asked Labour should say, “That is a matter of opinion, but whether we did or did not spend too much let’s not forget that the Tories agreed with that spending at the time”.

    This avoids contradicting what people are holding onto, lie or not, and shifts the argument to relative economic competence.

    Are Labour more or less economically competent than the Tories?

    We have proof that Osborne was promising to keep spending levels at the same as those by Labour right up to the crash and afterwards, both the Tories and the LibDems supported the bank bailout and Q.E. for the city.

    We should turn the question around and say, well if we spent too much, why weren’t the Tories saying so at the time? Why did they promise to spend the same?

    This moves the argument from Labour’s economic competence to the relative competence of both parties.

    Whether Labour were bad or not, the Tories are not better, is likely to be easier to sell than Labour did well and what you believe is a lie we could not be bothered to defend against. And definitely better than saying “yes we did it, we are economically incompetent”.

    Further we can then point out that they wanted less regulation of those who actually did cause the crash and that their austerity “Plan A” stopped a recovery that they inherited and flatlined growth for eighteen costly months.

    It is time to fight or simply give up…

  10. David Ellis says:

    Thatcher handed the British economy to the bankers when she privatised money supply and de-regulated the banks. The cynical realists (There is No Alternative) of New Labour took the whole thing to an entirely new level and tried to game the capitalist system. Brown’s endodgenous growht theory that promised no more boom or bust, Blair’s Third Way and Mandy’s Maoist urging of the bankers to `get rich and pay your taxes’ was opportunism on a grand scale. Naturally with the Ponzi Scam busted in 2008 the state was left with a huge shortfall in income as it has lost the enormous tax take from corporate taxes and taxes on bankers’ bonuses. New Labour spent in accordance with the money that was coming in unfortunately it was all based on a complete fantasy and not only that when the tax revenue stream dried up they actually guaranteed the laughably gigantic liabilities of the bankers to the world’s super rich. Labour will be fucked until it apologises for handing the UK over to the bankers and putting their Tory class mates back into power.

  11. Peter Rowlands says:

    A rather odd answer to the question, would it not have been simpler to say that the pre 2007 deficit was not particularly out of the way in terms of what was generally thought at the time, and the huge deficit subsequently created was almost completely due to taxpayer bailout of the banks.

    1. Mukkinese says:

      Rather than directly contradict what people think they know we should turn the accusations around.

      Accusation; “Did Labour spend too much?”

      Answer; “If Labour was spending too much, then why were the Tories promising to match that spending penny for penny?”

      Accusation; “This is Labour’s mess.”

      Answer; “The deficit did not cause the credit crunch, the credit crunch caused the deficit.”

      Accusation; “Labour’s spending after the credit crunch made things worse”

      Answer; “Whether you agree with the bailing out of the banks or not, at the time, both the Tories and LibDems supported it.”

      Accusation; “Labour should have regulated the banks more.”

      Answer; “That is true, as both Ed Miliband and Gordon Brown have said, but let’s not forget that the Tories were advocating less regulation.”

      Rather than simply telling people they are foolish to believe what they do, we should be pointing out facts that cannot be denied and make the Tories look no more competent than Labour.

      Cut away that advantage and they will be severely weakened at the polls. This is not a government that is liked, it is tolerated. And it is tolerated because it seems to be competent…

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