The deficit question, and how to answer it

Picture the scene: you’re a Labour leadership hopeful. The red ‘on air’ light in the Today studio is lit, and across from you sits John Humphrys. You’ve already navigated tricky questions on immigration and health, but then the inevitable happens. John looks up, smiles meekly, and says: “do you accept that the last Labour government overspent?” How do you answer?

Last week, one writer of this parish put forward one possibility: you accept culpability and beg the public’s forgiveness. While I don’t want to criticise its author for what was a well-written piece, I think this prognosis is wrong, and dangerously so. It’s wrong not just economically – Labour’s Treasury team can boast a very good track record, despite the Tory myth to the contrary – but also politically. To accept culpability for overspending is also to tacitly sign ourselves up to George Osborne’s deficit fetishism, and accept five more years of him setting the economic agenda. The questions we will be forever asked will be about what we plan to cut to make amends, and we’re never going to out-cut the Tories (nor should we aspire to). This would leave us once more standing on the austerity-lite platform that failed us so clearly at the last election.

But John Humphrys is waiting. What can we tell him instead?

The first point to make is that Labour was elected in 1997 with a mandate to invest more into public services that had been cruelly neglected under 18 years of the Conservatives. In the 10 years that followed we built 1,100 new schools, hired an extra 130,000 new doctors and nurses, saw class sizes and waiting lists fall, while educational standards and NHS satisfaction rose. That we were able to achieve all this while also cutting both the deficit and debt as a share of GDP, running more budget surpluses than Thatcher or Major managed in 18 years, and bringing debt interest payments to their lowest level on record as a share of GDP is a mark of how successful Labour was in office, and nothing to be apologising for.

One way we know that it was a success is that George Osborne himself pledged in 2007 to match Labour’s spending plans over the following three years. Far from urging us to ‘fix the roof while the sun was shining’, the now-Chancellor wanted Labour to continue with the plans that had served the country so well.

If Labour’s period in office had ended in 2007, no questions would’ve been asked about whether we overspent. But of course it didn’t: the reason the debt and deficit ballooned was because in 2007 we suffered a banking crisis that quickly spiralled into a depression. A cursory glance at history tells you that the debt and deficit always rise after a depression, the real question is whether Labour’s decisions helped or hindered our recovery.

Here too, we have a good story to tell: the decision to bail out the banks likely averted a much deeper crisis, and may also result in a small profit for the taxpayer. Nobel economist Paul Krugman said at the time “luckily for the world economy… Gordon Brown and his officials are making sense.” Even George Osborne called it “the right thing to do”. We also made the sensible decision to temporarily cut VAT, providing a stimulus for demand that may have saved businesses from bankruptcy. These interventions may have pushed up the deficit, but if they also saved the economy from sliding into a deeper malaise.

The Tory government treats deficit reduction as an end in itself; something that must be enshrined in ridiculous legislation. But this isn’t a zero-sum game: public spending has a multiplier effect on the rest of the economy, and if you lose more in lower growth than you gain in an improved balance sheet, it’s a trade-off that clearly isn’t worth making. Yet all the evidence suggests that this government is doing precisely that. When George Osborne first became Chancellor, he promised that by this point we’d already have eliminated the deficit. It’s no coincidence that we now find ourselves barely halfway to that target when the government’s growth forecasts were also spectacularly missed: severe reductions in public spending almost certainly damaged our prospects for recovery.

But Labour mustn’t be blasé about the deficit question either. Just because the policies we developed in office were correct for their time, it doesn’t mean that we should be continuing to pursue them now, not least because many of the issues of chronic underinvestment in public services were solved by the Labour government. There is now a tangible public appetite for greater caution with public money, and Labour has to move away from the presumption that throwing cash at a problem is analogous to fixing it. A good way to demonstrate this would be to reinvigorate the idea of conducting a zero-based budget when we first take office. Labour did make bad some spending decisions – just look at the colossal sums wasted on the National Programme for IT – and what the public want to see from us is a change of attitude that chimes with the situation we find ourselves in 2015, not 1997.

The Tories would like nothing more than for us to concede responsibility for overspending, because it would keep the public focus exclusively on the deficit. The way for Labour to regain economic credibility is not to dance to the Tories’ tune, but to develop its own compelling narrative.