Beyond Fiscal Fables & Greek Myths – Alan Johnson’s full speech


By Mark Ferguson / @markfergusonuk

Alan Johnson today gave his second major speech on the economy at the RSA, in which he attacked the government’s fables and myths on the economy. You can read the full speech below:

“The American writer, Tom Woolfe, once said “a Liberal is a Conservative who’s been arrested.”

I suppose a modern inversion would be that a Conservative is a Liberal who’s been coalitioned.

But Liberal Democrats only have a walk-on part in this drama.

When it comes to the economy, this is very much a Tory government.

George Osborne, declared one important truth at the despatch box on 20 October when he said “to govern is to choose”.

But the Conservatives and their Stockholm Syndrome Coalition partners have adopted a policy of pretending they have no choice in order to try and evade responsibility for the one they’ve made.

Thus we have a mantra that is more to do with message discipline than fiscal discipline. It goes like this:

“After a decade of debt and reckless spending we’ve taken our country back from the brink of bankruptcy.”

Snappy and succinct but untrue.

It’s part of a narrative that denies there was ever a global financial crisis and gives no credit for the actions of the UK and other G20 countries at a time when we really did stand on the brink.

Not giving the credit due to your predecessors in government is nothing new and not of itself reprehensible.

But as we emerge from the most serious economic threat that the World has faced for 80 years the debate about where we go from here is inseparable from the debate on how we got here in the first place.

We cannot allow fiscal fables and Greek myths to provide the context of this vital debate.

And we cannot allow the government to get away with their most audacious myth – that there is no alternative to their economic masochism.

For Ed Miliband and for me, Labour’s economic credibility matters. It will be at the heart of everything we do.

It doesn’t mean ignoring what we got wrong – but it does mean standing up for what we got right.

So I want to use this speech to:

a) Establish the facts of what went before; what we got wrong as well as what went right
b) Explore where those facts leave the real political debate in this country; the choices we face
c) Encourage the government to engage in a proper debate about those choices

So let’s deal with the claims they make compared to the facts.

They claim that we’ve seen a “decade of debt” – the simple and inescapable truth is that Labour paid down debt.

In 2007/8 as the crisis hit, we had the second lowest debt level in the G7 reduced by 14% in the 10 years we’d been in office.

And the claim that we presided over years of ever-rising borrowing is also untrue.

The year before the crisis hit we were borrowing 2.4% of GDP compared to the 3.4% we inherited from Ken Clarke.

And our borrowing (unlike Ken’s) was almost entirely to finance capital investment in schools and hospitals, road and rail.

It wasn’t to pay for day-to-day expenditure as it was in the 1990s.

We were clear – handing on to future generations some of the cost of the infrastructure that they will benefit from is acceptable. Handing on the cost of today’s benefits and pensions is not.

We were never living beyond our means. Borrowing was falling before the crisis as it was at the time of the General Election and forecast to fall in each and every year from the recession induced peak of 2009/10.

The second myth about our record is that even if public finances overall were under control, we were still spending too much.

That what we were spending on our schools and hospitals was excessive given the size of our economy.

That certainly wasn’t an accusation made by the Conservatives or Liberal Democrats at the time. Our last set of spending plans was announced in the Comprehensive Spending Review of October 2007. If our political opponents thought that spending was out of control, that was the time to say so.

George Osborne had only one substantial criticism to make on spending.

Was it that spending was too high? That he wouldn’t match our plans because we’d had a decade of debt with reckless spending? No. His criticism was that the growth rate of spending had been cut in half. And Vince Cable was castigating the then-Chancellor for what he saw as too measly a growth in health spending.

You may be interested to know that the man who is now Chief Secretary to the Treasury was so much in favour of spending restraint that he told the Times after the 2008 Budget:

“the government should introduce seasonal grants of £100 per child for the poorest families and an extra £100 per family in winter to help with the costs of fuel.”

Yes – it’s the same Danny Alexander who now says we were spending too much and who is taking away £500 from each child born into the poorest households by abolishing the Child Trust Fund.

The answer to the question “was our expenditure on schools and hospitals excessive given the size of our economy” – has to be a very clear “no”. There was no binge.

UK spending on education as a proportion of GDP was 5.8% in 2007- almost identical to the OECD average of 5.7%.

The year after, spending on the NHS was 7.2% of GDP compared to 8.7% in Germany and 8.1% in France.

Yes it was a huge increase on the chronic under-funding of the Tory years when 80% of kids in my constituency left school with fewer than 5 decent GCSEs and women gave birth in a former workhouse built in the 19th century.

But it hardly represents excessive spending that had spiralled out of control.

The most recent claim to emerge is that Britain was on the brink of bankruptcy as Osborne claimed in the Comprehensive Spending Review debate.

Let’s revisit what happened during the recession and where Britain was when George Osborne received his seals of office.

Britain had already spent almost three complete quarters out of recession and borrowing was falling.

It had risen not because of Labour’s spending before 2007 but because the global financial crisis caused tax receipts to fall and spending to rise as companies saw their profits fall and workers had their hours cut.

We allowed these automatic factors to increase borrowing and temporarily added to it by providing extra support last year via a fiscal stimulus when the economy was at its weakest thus preventing economic meltdown.

It also provided momentum to push the economy out of recession and into growth with unemployment at half what it was in the 1990s recession despite forecasts that it would reach 2.44 million by the end of this year.

It’s that same momentum that has driven growth in the most recent quarter.

House repossessions and business insolvencies were also at half the levels we saw in the last recession.

As Martin Wolf pointed out in the Financial Times recently, the UK’s level of actual and prospective debt is, and will remain, below the average of the past two centuries.

It’s a long time to have been on the brink of bankruptcy.

There is one more claim that I’ll return to later which we’ve come to know as the Greek myth.

So, I am proud of what Labour achieved in government and proud too that according to the IFS we used the tax and benefit system to close the income gap and break the historic link between being old and being poor with pensioners today being no more likely to be in poverty than any other group in society.

So having set out the facts and rejected the government’s re-telling of history with all its Orwellian overtones, let’s move onto where those facts leave the debate today.

Borrowing is too high and we need to bring it down.

Spending under Labour was not out of control and indeed it was strongly supported by both the Coalition parties but a major crisis has intervened since then which has radically altered the fiscal landscape.

This is a key point because irrespective of our profound and fundamental disagreement about how quickly we bring down the deficit, the simple fact is that the world economy has been totally transformed over the past three years.

Here in the UK, we have seen a fall of 6% in our national income.

In the short-term that meant large falls in tax receipts and increases in spending.

The automatic stabilisers worked and borrowing rose – hence the deficit.

That in itself is not a problem for future spending – because if we can get people back into employment, these changes will work automatically in reverse as well.

But most experts believe that around 5% of the fall in our national income is permanent.

So it will not return – even when the recovery is complete.

This is the lasting effect of the credit crunch both here and around the world.

And over time, as we emerge from the recession, our spending needs to reflect that fact.

But it’s playground economics to work back from that in order to claim that in some way spending on health, education and extra police officers caused the global economic tsunami.

In any mature debate about the economy it’s important to admit that we got some things wrong.

Aside from recognising the failures in national and international regulation there are lessons to be learnt on public finances too.

Not the crass claims of imprudence and profligacy but in one area in particular – the tax base and one element specifically – it’s resilience.

Before the crisis hit, the City paid around 25% of overall corporation tax in this country – £10bn in 2007/8.

And it contributed significantly more from income tax and National Insurance Contributions.

A booming sector with high remuneration and profits was paying a lot of tax but this reliance on the financial sector made our tax base less resilient when the global financial crisis hit.

Profits in the financial sector are always heavily pro-cyclical, even more so when a recession is driven by a credit crunch.

Similarly the housing sector provides significant revenue through stamp duty, inheritance tax and capital gains tax.

It also contributes indirectly through the VAT collected on housing-related consumption.

Again revenue from the sector was heavily reliant on its success – both in terms of prices and transactions.

The run-up to the financial crisis saw significant increases in tax receipt from both these sectors from around 3% of GDP in 2002/03 to 4.25% by 2007/08.

Receipts from those sectors were growing faster than the economy as a whole – making up half the increase in total receipts over the period.

So the tax base was becoming more reliant on sectors that were likely to be particularly at risk from a downturn.

Housing and financial sector receipts fell below their 2002/03 level last year as the global credit crunch made its impact felt.

And because the permanent hit to our economy that I’ve mentioned is expected to manifest itself significantly in these sectors, this fall in receipts is contributing directly not only to the increase in borrowing but to the structural deficit.

What should we conclude from this?

Obviously not that the actual receipts themselves were a problem, indeed, we believe that the financial services sector was under-taxed given the subsidy we now know government’s implicit guarantee of rescue provided.

No, in my view the conclusion goes much wider.

It is that a skewed tax base is a symptom of an unbalanced economy.

A proper understanding of how reliant our tax base had become on certain sectors should have made clear that our economy was too narrowly focused.

To put it another way – the tax base provides a lens through which to recognise distortions of this kind and signal that the government should do more to promote economic diversity.

The Office of Budget Responsibility provides an opportunity to deal with this issue.

Its responsibility for forecasting tax receipts should be extended to require a regular assessment of the resilience of the tax base. This should form part of its annual analysis of the sustainability of public finances.

We need to be sure that the OBR is truly independent and genuinely transparent before we attempt to amend the Bill currently in the Lords to extend its remit in this way.

The final aspect of the serious debate about our economic future requires honesty from the government.

There is a school of thought that supports a much smaller state sector.

That believes the public sector crowds out the prospect of private sector jobs.

That accepts public services as a safety-net but rejects their role in securing excellence as mainstream providers.

It is a view that I fundamentally disagree with and that my party doesn’t subscribe to but others do.

From some of the hyperbole we’ve heard in the House from the government benches, you’d be forgiven for thinking that they’d spent the last 13 years in opposition arguing that principled position – opposing investment in our public services.

As I’ve already demonstrated they continued to support our spending plans and indeed argued for more until after the collapse of Lehman Brothers.

But leaving this aside, now is the perfect opportunity for those who believe it to make that argument openly and honestly. To say that the scale of the spending cuts – which no other country is following including those with fiscal deficits as high or higher than our own – is in pursuit of the ideological objective of a smaller state.

This may well be what is driving this government to cut deeply and quickly and to do so at a time when recovery is far from secure.

It’s important to remember that no other country is going this far, this fast.

The US, which has a higher deficit, plans to reduce it by less than half over the next 5 years. Japan, which has roughly the same level of deficit is learning from its experience of the last decade and cutting by less than quarter

Our plan to halve the deficit by 2014 was robust, completely in accordance with the G20 Pittsburgh accord in 2009 and indeed the Toronto accord in July of this year.

The government quotes approval from organisations such as CBI, OECD and IMF but, as I said in the CSR debate, the Irish government could quote such approval for their eye-wateringly tough measures and they’re back in recession with further bad news this morning.

Politicians do not just deal in the cold calculations of economic institutions; they are responsible for engaging in the reality of people’s lives.

We live in uncertain times and no-one can predict with any clarity how the global economy will perform over the coming months or years. The Bank of England’s quarterly Inflation Report admitted as much yesterday.

It seems to me to say a great deal about this Chancellor that despite the clear lack of consensus, even on the MPC, about the direction of the economy and the impacts of the consolidation, on this uncertain journey he has chosen to ignore the signals saying “proceed with caution”, and instead gone full speed ahead.

This wasn’t surprising from a Conservative leadership who almost uniquely in the Western World, called for spending cuts at the height of the recession. It was surprising that the Liberal Democrats in general and Vince Cable in particular went along with a policy they had vigorously and I have to say, eloquently, opposed.

Here we come to the Greek Myth and the claim that they discovered something on taking office that they hadn’t known during the election campaign.

As expert witnesses to the Treasury Select Committee last week confirmed this was simply not the case.

Far from emerging on May 2010, the problems in Greece had been abundantly clear since the turn of the year. All that changed in May is that the Euro Zone finally made some progress in resolving the situation.

The sudden spike in Greek bond yields in April and the downgrading to junk status was the result of fears that Germany may not approve the Greek bailout rather than anything new in the nature or scale of the Greek debt. Once that was resolved, the crisis abated.

We know this from first-hand experience. Nick Clegg is fond of mentioning the important meeting of EU finance ministers that took place the weekend after the election. But neither Nick Clegg nor George Osborne attended.

They weren’t in office. Alistair Darling was and as he said – the only thing that changed that weekend was Nick Clegg’s desire for a ministerial car.

And so our approach to reducing the deficit, ensuring that there was sufficient private sector momentum before the public sector cuts began, cutting back more carefully with genuine protection for the poorest and more vulnerable and with a meaningful strategy for jobs and growth was a continuation of the approach we took to bring this country through the global recession.

Because for us, jobs and growth need to come first. If the recovery is undermined, it will cost us more. For every 100,000 people who find themselves out of work it costs the taxpayer half a billion pounds in benefit payments alone.

The government itself tells us that its plans will see 500,000 jobs in the public sector going. And PricewaterhouseCoopers have predicted that the same number of jobs will be lost in the private sector. And that’s an important point.

This isn’t about arguing that the public sector should remain the size it is now. It’s about understanding that, when the world economy faces a difficult time and the recovery at home remains fragile, now is not the time to be taking a gamble with people’s livelihoods.

Two years ago the world’s leaders showed that they could act together in the face of an economic crisis. Those risks remain – and the same cooperation is needed today. But the worrying signs ahead of this week’s G20 does nothing to reassure us that the political will is there to make a difference.

I hope the government is right about growth, but the risk is that the private sector simply cannot create jobs at the pace that will be required. And families up and down the country will pay the price.

It’s ridiculous to accuse us of having no plan (which the government combines with saying how our plan would have cut departmental budgets by more that they intend – so no plan except for that plan).

It’s true that we didn’t announce details of a new CSR over a year before it was due to kick in. But we published the Budget with itemised changes on public sector pay, pensions, efficiencies, taxes and all the voluminous detail contained in the red book.

In the March Budget we itemised £21 billion reduction in the deficit from tax rises and over £20bn of the spending reduction that would be necessary.

I set out that we would support a further £7.5 billion of tax rises, and billions in welfare reforms, in my speech at KPMG four weeks ago.

We would tax banks more, attack children’s benefits less and prioritise policing.

We would not raise VAT and we would have retained the Future Jobs Fund, the abandonment of which is probably the greatest single error amongst many that the government has made.

And, as Douglas Alexander set out in a thoughtful speech last week, we would approach welfare reform in the context of our values of solidarity on the one hand and obligation on the other. Responsibility for ourselves, reciprocity towards each other – protecting better but demanding more.

The programme pursued by the government to get people on Incapacity Benefit back to work is, of course, exactly the one that we were due to implement over the same period.

The Greek Myth is meant to justify abrogating election pledges on everything from VAT to child benefit but it can surely not disguise the single biggest victory for the Tory ideology of a smaller state – the funding of higher education.

Let me declare my paternal interest in a policy I helped create.

In 2004 Labour argued that graduates should make a contribution to their higher education.

The Tories opposed any contribution saying that the answer to the higher education funding gap was to contract the number of students.

The Lib Dems agreed with the expansion of HE but thought it should be funded entirely by the taxpayer.

Many in my party took the same view but considered the change to be necessary and narrowly won the vote.

Our bravery has been vindicated. Fees were introduced at the same time as a substantial increase in funding by the taxpayer, our universities have flourished and the social class gap, which widened during 40 years of free university education, has narrowed considerably with a 30% increase in youngsters from poorer homes going to university since fees were introduced.

The Conservatives ended their opposition to fees in 2005.

I always felt that whilst the Lib Dems were wrong, their position that students should make no contribution was a genuine conviction.

For their leaders to leap from opposing any graduate contribution to students paying the total cost of their university education is probably the most cynical political betrayal I have ever witnessed.

The government is withdrawing public investment from most undergraduate teaching. The arts, humanities and social sciences will receive no public funding whatsoever.

At a time when our economic future will depend on this country’s strengths as a powerhouse of innovation, with higher education as a major component, the government is wrong to abandon the Dearing principles upon which Labour’s policy was based in favour of the miserable and narrow utility of the Treasury approach to Higher Education.

We welcome the fact that the Conservatives and the Lib Dems have accepted that graduates should make a contribution but we disagree with the principle of them paying all the cost.

This is the central issue now and it’s why the Shadow Cabinet has agreed to look at whether a graduate tax can be a fairer and more sustainable alternative to the current mess as part of our policy review proposals.

People not dissimilar to Cameron and Osborne used to tell me in 2004 that we need plumbers not graduates.

You know it’s a curious fact that it was never going to be their kids that became the plumbers.

The truth is – we need both and the Greek Myth is being used to destroy a system of funding that ensured that the student contribution enhanced rather than replaced central funding by the state.

Tuition fees is a perfect example of how the Greek Myth excuse of the Lib Dems combines with the smaller state quest of the Tories to produce a disastrous policy for the country.

Ed Miliband is leading Labour into a new era.

We will use opposition to discuss and debate, to reflect and renew.

No party having lost power can ignore its record in government.

But in today’s economic climate with the country going through a difficult period it is essential to keep returning to the question of how and why this happened.

The government has chosen to distort and misrepresent our record in a way that goes beyond the normal cut and thrust of British politics.

That’s why we have to set the record straight.

Labour transformed health and education, and reduced crime.

We managed an economy with controlled inflation and low interest rates whilst supporting the poor and vulnerable.

The country experienced the highest level of employment ever and paid down our debt to the second lowest of the major developed countries.

Like all advanced economies, the UK was hit by the global banking crisis and because we have one of the biggest financial sectors in the world, we were particularly badly affected.

Ultimately however, it was the fiscal deficit that prevented economic meltdown. No responsible government could have avoided it but we came out of recession with nearly a million fewer unemployed than expected, minimal repossessions and not a single penny lost to British savers in UK banks.

Our plan to reduce the deficit was robust and more considered than the reckless gamble that the government has decided to take with our economy and public services.

We need a mature debate about our economy; just as the causes of the current global crisis are complex so the solutions must admit to greater complexity, fewer unavoidable and a consideration of genuine alternatives.

We stand ready to engage in an honest debate with the government on these issues when we move beyond the fables and myths to the complex reality of the problems we face.

This is the very least the British public should be entitled to expect.”

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