Sunday, June 07, 2015
After wasting five years, Labour will struggle to rebuild economic credibility
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

The general election is becoming a fading memory but its implications will be with us for some time. For the Conservatives, there is the task of delivering the spending cuts necessary to complete the task of eliminating the budget deficit.

The Paris-based Organisation for Economic Co-operation and Development (OECD) has offered advice, suggesting to George Osborne that “evening out the profile of fiscal consolidation” would make sense. I don’t think this piece of OECD advice will be particularly unwelcome.

In his March budget, the chancellor left us with a “roller-coaster” public spending outlook; down sharply in the first two years of the parliament, then up dramatically at the end. As I have written before, it will be very surprising if, now he is safely back in 11 Downing Street, he does not take the opportunity, in his July 8 budget and the spending review later in the year, to indeed even out this profile. Thursday’s announcement of a £4.5bn package of cuts and asset sales, includingof £3bn of a £1.5bn sell-off of the government’s remaining 30% stake in Royal Mail, were part of the smoothing process.

To the victors go the spoils, however, and the challenges for the Tories are as nothing compared with those for Labour. Labour has now lost two elections, largely because of a lack of public trust in its ability to run the economy. The task for its leadership hopefuls is to rebuild economic credibility, and it will not be easy.

We will never know whether Labour was ever in with a shout of winning the election, or even being the largest party. One thing that helped guarantee it would not happen, even apart from Ed Miliband’s absurd “Ed Stone”, was the Labour leader’s refusal to concede that his party had overspent when in government.

In 2011, Miliband appeared to be on the brink of wiping the slate clean, apologising for the regulatory failures that contributed to the crisis. Given that London was at the heart of the crisis that was probably the least he could have done. And, given that politicians do not get themselves directly involved in financial regulation, blaming the failure of officials at the Financial Services Authority, Treasury and Bank of England was not too hard.

That same year Ed Balls, then the shadow chancellor, also appeared to be on the brink of truth and reconciliation, apologising both for regulatory failings and for the fact that “we didn’t spend every pound of public money well”. But that was it. The attitude then appeared to shift to blaming everything on the bankers and conceding nothing on the disaster that befell the public finances.

This was strange. While some Labour die-hards insist the party has nothing to apologise for, resorting to the absurd “spending increases did not cause the global financial crisis” the evidence is clear.

Public spending increased by a plainly unsustainable 51% in real terms between 1999-2000 and 2009-10, overwhelmingly ahead of the crisis. The OECD says Britain had an underlying or structural budget deficit of 5% of gross domestic product in 2007, behind only Greece and Hungary. Though its estimate at the time was lower, it believed and said at the time that Britain’s was the fifth largest structural deficit among its members.

The Office for Budget Responsibility’s measure of the underlying deficit, cyclically adjusted net borrowing, hit 4.1% of GDP in the mid-2000s. Between 40% and 50% of the record peacetime structural deficit was in place before the crisis hit. Incidentally, that underlying deficit is now back to where it was in the mid-2000s, suggesting the effects of the crisis have been eliminated, but not the overspending that preceded it. The OBR points out that Britain was one of a tiny number of countries to increase debt as a percentage of GDP from 2004 to 2007.

Overspending was recognised at the time. Martin Weale, the distinguished former director of the National Institute of Economic and Social Research, pointed out repeatedly that the government was bending its own fiscal rules. So did other bodies and commentators.

So, belatedly, did Labour. In 2007, Gordon Brown prepared the ground for a shift from public spending growing more rapidly than GDP to restricting its growth to less than rise in GDP. Spending would still rise, but by 2% a year in real terms, rather than 5%. Whether that slower spending growth would have been achieved in the run-up to a general election with Brown in 10 Downing Street, we will never know. The crisis intervened. The good things Labour did, including Bank of England independence, a strengthened competition regime and some of the increased spending on public services and infrastructure, got lost in the reputational collapse.

The pre-crisis deficit had two implications. One was that the size of the deficit meant the temporary fiscal stimulus introduced to limit the economic damage from the crisis – mainly a 13-month reduction in Vat – had to be small. The second was that roughly half of the austerity programme adopted by the coalition government in 2010 was necessitated, not by the crisis, but by Labour’s pre-crisis spending largesse.

How are the Labour leadership candidates doing in wiping the slate clean and trying to move Labour on? It is given added piquancy by the fact that two of them, Andy Burnham and Yvette Cooper, were Treasury chief secretaries, and so responsible for spending, though in both cases mainly after the damage had been done. Burnham did the job from mid-2007 to early 2008 and Cooper from then until June 2009, when the unfortunate Liam (“there’s no money left) Byrne took over.

Burnham has made an encouraging start. “If we are to win back trust we have to start by admitting that we should not have been running a significant deficit in the years before the crash,” he said recently. Liz Kendall, who should also make it on to the final ballot, has said bluntly: “We were spending too much before the crisis.” But Cooper, who is married to Balls, while shifting her position a little, appears most closely wedded to the line that helped lose Miliband the election. The deficit was small before the crisis, she has said, focusing on its narrowest definition, and it would not have made much difference if there was a small surplus. Voters, rightly, do not believe that.

Whether Labour can begin to wipe the slate clean therefore partly depends on its choice of leader. By 2020, of course, the 2010 legacy will be a distant memory, but these things have a habit of sticking. After the International Monetary Fund crisis of 1976 and the winter of discontent of 1978-9, a lack of economic credibility kept Labour out of power for 18 years, even failing to win in April 1992 when the general perception was that the economy was still in recession.

It required a combination of Tory self-inflicted economic wounds, including the September 1992 ERM (exchange rate mechanism) humiliation and the rebuilding of a Labour economic policy platform under Brown and Tony Blair, to tilt the balance decisively.

Something similar will be needed again, whether or not the Tories implode. Labour has to be trusted to spend prudently, tax sensibly and pursue pro-business policies. After wasting five years not doung any of that, it will be an uphill task.