Below Peter Hain has written an open letter to Labour’s leadership candidates
Comments by some Labour leadership contenders that the last Labour Government may have borrowed too much or even over-spent before the 2008 global financial crisis raise fundamental questions about the Party’s ability to project a winning economic programme for the future.
They also play to the Tory and media agenda by falsifying Labour’s pre-crisis record, fail to put Labour’s rather modest 2006 and 2007 budget deficits into context, and don’t acknowledge the mammoth effort required to deal with the biggest financial crisis since the 1930s and its impact on UK national debt and budget deficits.
By June 2007, when Gordon Brown took over from Tony Blair, Britain had enjoyed under Labour a record ten years of continuous economic growth, low inflation, low interest rates, record employment, big cuts in child, pensioner and working poverty, dramatic reductions in NHS waiting times, record infrastructure investment, and improved living standards.
No-one was especially worried about the level of public spending or the size of Britain’s budget deficit. UK national debt had fallen from 42 per cent of GDP under the Tories in 1997 to 38 per cent in 2007 – below that of France, Germany, the USA, Italy or Japan. The budget deficit was well within the three per cent limit of GDP set by the EU Stability and Growth Pact. In September 2007 even David Cameron publicly pledged to match Labour’s spending plans up to 2010.
In financial markets the FTSE 100 share price index had hit a six year high, showing optimism about Britain’s economic prospects under Labour. Bank credit default swaps – the cost of insuring bank loans against the risk of borrowers failing to repay – had reached an historic low, another sign of real confidence in Britain’s future.
The consensus was that the UK economy was in good shape and its prospects looked bright, with lead responsibility for keeping the economy stable through monetary policy handed over to an independent Bank of England.
Of course subsequent events proved that both Labour Ministers and Tory Shadow Ministers were wrong to believe both that we had put an end to boom and bust and that light touch regulation was enough to ensure financial stability. But very few commentators said so at the time.
There was no clamour for public spending cuts. That only came after the autumn 2008 financial crisis which the Tories seized on with their Big Deceit that ‘overspending’ by Labour had left the country with mountainous levels of national debt and a huge budget deficit.
The truth is Britain’s 2007 budget deficit of £39 billion or 2.7 per cent of GDP was dwarfed by the colossal cost of subsequent state support to save Britain’s failing banks which by 2009 was equivalent to some 90 per cent of GDP.
The cost to UK taxpayers of bailing out Britain’s banks had peaked at £133 billion in cash outlays alone. But by 2012 the potential total taxpayer liability including cash outlays, government guarantees and Bank of England support had exceeded £1160 billion or ten times the annual cost of the NHS.
By tackling the banking crisis and the recession that it provoked Labour solved a private sector financial problem but at the price of transforming it into a public sector fiscal one as taxpayers picked up the huge bill from reckless bankers. Consequently the UK debt to GDP ratio more than doubled from 37 per cent in 2007-08 to 80 per cent in 2014-15. Significant cuts in public spending to produce something a bit lower on the budget deficit scale in 2007 would have been totally irrelevant to the stratospheric impact of the crisis or how the last Labour government was able to manage it.
So my questions to Labour leadership contenders are these:
-Surely you agree that rebuilding Labour’s reputation for sound economic management makes it essential to correct the Tory Big Deceit, about Labour ‘over spending’?
-Do you accept 200 years of economic experience demonstrates that the best way to bring down the debt burden is to encourage the economy to grow, not to slash public spending? Surely growth not still more austerity is the answer?
-Instead of targeting a budget surplus surely what is needed is sufficient public and private investment to establish the quality infrastructure, the millions of new houses, the high skills and the cutting-edge technology to sustain a competitive productive economy?
-Surely that is better than copying current Tory policy of building UK prosperity upon a consumerist chimera of high personal debt, artificially inflated housing assets and a disastrous trade gap?
-Do you also agree that Labour cannot back Osborne’s Victorian idea for permanent budget surpluses except during recessions? Such pre-Keynesian neoliberal dogma would mean a constant squeeze on public spending after tax cuts that deliberately put a budget surplus beyond reach. Surely it is Osborne’s equivalent of the Tea Party ‘starve the beast’ strategy in the USA, aimed at shrinking the state for dogmatically political, not soundly economic, reasons?
I would be grateful for your response in time for it to be published by the end of July.
Former Labour Cabinet Minister and MP, Peter Hain is author of Back to the Future of Socialism