I was arguing with a Tory supporter the other day on twitter (I know….) . Apparently Labour over-spending caused the financial crisis (the big ‘credit crunch’ of 2007, the greatest recession since 1929). It was not the banks (Lehman Brothers et al) too ‘big to fail’, that sold and re-sold each other packages of ‘toxic’ debt, nor was it was not the corrupt ratings agencies (Moody’s et al giving AAA ratings to ‘financial products’ full of ‘sub-prime’ mortgages). It wasn’t the collapse of the United States housing market, the effects of which reverberated across the globe (because to use an old maxim – when the US sneezes, the world catches a cold). No according to George Osborne, according to David Cameron (both known for their economic expertise) and parroted by the very willing media empires of Rupert Murdoch & Viscount Rothermere, it was too much spending by Labour. Too much spent on the NHS, on greedy nurses & doctors. Too much spent on the police, the fire-service & the army. Too much spent in local councils on essential services – libraries, bin collection, local housing authorities, SureStart centres. Too much investment in universities, flood-defences, infrastructure ……and so on….
This ‘myth’ that public spending caused a crisis that began because of private greed has perpetuated for nearly 6 years. The slick, empty PR machine that is the Conservative party has painted since 2010 an image of the Conservative government using the ‘broom’ of austerity to sweep up the Labour mess. The ‘we’re all in this together‘ sound-bite – belt tightening, short-term pain but we can grin & bear it, stiff upper lip, old chap.
“the other lot were very well-meaning, but they borrowed too much and spent all the money, so we’re going to have to cut back.”
But does the data match the narrative peddled by Cameron & Osborne? No is the simple answer. You want more? Okay, lets go in-depth. So, first things first, did Labour borrow too much? Lets get out a diagram, everyone loves diagrams.
So this diagram shows the budget balance 1977 up to 2011 (the first year of the coalition government). Where the balance is indicated as positive, this shows the government received more in taxes than it spent in a year. A negative balance indicates a deficit meaning the government spent more than it received in taxation, and borrowed more to cover this. The chart shows surpluses in the early years of the Labour government, followed by the deficits around 2002/3. In the final years before the recession (2007/08) the deficit was very small (virtually zero at – 0.4%). Compare & contrast this with the much larger deficits under the Conservative government in 1992-4. The International Monetary Fund (IMF) note that during the last time Conservative governments ( 1979 – 1997) Britain ran 18 structural deficits in 18 years. Odd.
The Office of Budget Responsibility shows the government at the time was not borrowing excessively. This is evidence that it was not the public sector which created the crisis of 2007/08, but the private sector.
Second, if Labour didn’t borrow too much, did it spend too much? So Labour was in power from 1997 -2010. Despite the simplistic narrative of the finances of a modern nation-state being equivalent to ‘house-hold income’… promulgated by Osborne & the Conservatives, in the real world, simply having a structural deficit does not equate to overspending. If the budget deficit is included on this, then Britain as a nation has ALWAYS over-spent…. The Conservatives then seem to be painting ‘too much spending’ as a exclusive phenomenon attached to only Labour governments, when this is far from the reality.
In this period of time the structural deficit was cut by 82%, the budget deficit by 85%, PSNB borrowings by 32% and Debt by 16% (see Diagram 2 – a reduction from 1997 onwards). During the period of government from 1997 up till 2007 (deficit of 0.4%) Labour’s average structural & budget deficits were at 0.1% per annum.
So thirdly, on to the ‘budget deficit’ post 2007 (the UK ended up with a structural deficit of -5.3% and a budget deficit of – 7.6% in 2010). The Conservatives again link this to over-spending by Labour exclusively as the cause. However the IMF concluded the UK deficit increased because of a large fall in income gross domestic product (GDP) and output caused by the global banking crisis (see Diagram 4 below).
Increases in expenditure do not cause recessions because in a downturn income GDP falls sharply. The budget deficit between 2007 – 2010 increased not because of a – 0.4% structural deficit or a – 0.4% current budget deficit in 2007. It increased because of a economic chain reaction – a sharp fall in GDP and output. By virtue of global recession income falls and tax revenues decline. Further as businesses cut back because of increased business costs associated with recession this means the unemployment rate rises. Because of increasing unemployment government expenditure to increase because more people start to claim unemployment benefits and as result the budget deficit rises. To put it simply in a way even the most ardent, rabid Tory can understand:
The budget deficit worsens because as GDP declines by virtue of recession; tax revenues decline too; consequentially expenditure automatically increases; meaning the government has to borrow to make up the short-fall (from the decreased tax base for the exchequer)
So there you have it…..but I don’t know if this will change peoples minds…..people seem pretty entrenched in their views for some reason…. maybe its an ideological issue…or perhaps to use this crisis as an opportunity…..an opportunity to use fear of ‘financial Armageddon’ to trick people – devastate the welfare state, permanently decimate the public sector & transfer public assets into wealthy, private hands….
If all that depresses you, here is a video of Osborne being grilled by the Treasury Select Committee (4th November 2010) on this very topic (skip to 1:39 minutes to see my local MP John Mann wiping the smirk off his face).
Mann: Let me give you six countries – Italy, France, Germany, Japan, United States and United Kingdom. Of those six, which has got the lowest national debt to date?
Osborne: Well, erm erm… what I would point out….
Mann: Its a simple question. Which of those six has got the lowest national debt to date, as a percentage of GDP?
Osborne: Well the answer is the UK
Mann: The answer is United Kingdom. In four years time on the current projections, which will have the lowest?
And even if you honestly believe that the reason the debt & deficit are so high is because of Labour. If you truly still believe austerity is necessary to reduce the deficit and hence eventually reduce the debt. If you are certain of all these things, then lets assess if 6 years of austerity under Gideon has done anything to reduce either the deficit or the debt. In 2010, the total national debt was approximately £800billion (having increased by virtue of the above factors – measuring debt as a proportion of GDP). Since Cameron, Osborne and the rest of the ‘Bullingdon Club’ took office the debt has more than doubled. It now stands in the region of over £1.5 trillion (as of Q1 2015 – 81.58% of total GDP). £1,500,000,000,000 and growing. And growing. And growing.
By Frederick Antonio Gallucci | International Law LLM | @gibblegbble