Last week I heard yet another member of the Coalition government saying that they were sorting out the financial mess left to them by the last Labour government. This time it was Danny Alexander talking on BBC Radio 4's The World At One. In response, Chris Leslie made the point that the economic crisis that led to the Great Recession was global in nature and that Gordon Brown wasn't flying around the world making foreign banks fail and undermining confidence in the Euro. One point he didn't make and one that I haven't heard made very often, is that debt as a percentage of GDP in the UK was lower under Labour in 2008, before the crisis really started, than it was under the outgoing Tory government in 1997. Blair inherited a debt ratio of 42% from John Major and by 2008, following 11 years of so-called unfunded, reckless expenditure, Labour had reduced this to 35%(ONS, chart at the bottom of page 2). That's a reduction of almost 17%. I don't remember any Tories saying that 42% was a dangerously high level of debt at the time. Indeed, during the early years of the Blair administration, leading Tories, including Ken Clarke, the last Chancellor under Major, sought to take credit for the economic success Labour was enjoying by claiming that it was due to the golden economic legacy bequeathed to them by the outgoing Conservative government. You can't have it both ways. Either 42% is perfectly serviceable and reasonable so 35% is even more prudent, or 35% is profligate in the extreme whereby 42% must be even more so.
Simon Wren-Lewis has written a number of times of his exasperation with Coalition myth making on this issue (see an example here). His view is that the worse you could say about Labour's record of managing the public finances is that fiscal policy was a bit too tight at the beginning of their term in office and maybe a bit too loose at the end.
Clearly, the debt ratio exploded across the developed world during the Great Recession, but this wasn't due to excessive government spending commitments coming home to roost. Mark Blyth in his excellent book, Austerity – The History Of A Dangerous Idea, exposes this other myth:
'Again, according to the IMF, of the near 40 percent average increase in debt across the OECD countries expected by 2015, half has been generated simply replacing lost revenues when tax receipts from the financial sector collapsed. To put it bluntly, the state plugged a gap and stopped a financial collapse. It did not dig a fiscal ditch through profligate spending.
In the United Kingdom, in particular, the collapse in tax receipts was especially alarming since nearly 25 percent of British taxes came out of the financial sector. Little surprise then that Britain's debt ballooned. Of the rest of the increase in government debt, some 35 percent is the direct cost of bailing out the banks. Meanwhile, that antistate whipping boy for the growth in the debt, the fiscal stimulus, amounts to a mere 12 percent of the total. So if you want to blame the stimulus for the debt, you are going to try to account for the missing 87.5 percent of the effect.'
So, the public sector debt crisis was well and truly born and raised by the private sector. It's quite a charge sheet. Yet the former head of Barclays, Bob Diamond, said some time ago that the time for apologies was over. Some of us would be happy to see an end of bankers' apologies if we thought we were seeing the beginnings of the restitution of the 87.5%.
The Economist tweeted yesterday that 'Labour's growing contempt for capitalism is dangerous for Britain'. Contempt is a strong word. But I think any objective observer would feel sympathy for those who expressed some discontent with today's free market capitalism given its recent record.
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