Labour didn’t cause a global financial crisis because we ran a small deficit over several years leading up to the recession.
We don’t have a huge deficit now because Labour spent 13 years rebuilding our schools and hospitals.
But we did have less room for manoeuvre than we would have liked.
Because despite 10 years of economic growth under Labour we entered the recession with a small deficit, and I think it is right to say that it should have been at the very least a small surplus.
That’s not to say the public finances were in a mess, it was a manageable deficit as long as the economy was growing. But when it stopped growing we weren’t in as good a position as we should have been.
Ed Miliband is right when he says this deficit was smaller than the one we inherited from the Conservatives but it’s not really the point. The Tories left a deficit as a legacy of the recession that occurred after Black Wednesday and it’s silly to ask voters to judge our record as if there wasn’t a ten year gap between us inheriting the deficit and the financial crisis occurring.
We’re also making moves in the right direction with our admission that if we win in 2015 we simply won’t be in a position to reverse all the cuts made by the Tories. The money will have been spent and we won’t be able to magic up some more.
Hindsight is a wonderful thing and it is frustrating to have to say we should have been running a surplus and not a deficit, knowing full well that if we reduced spending or increased taxes to such levels we would have had an uproar from the public who, like us, were still in a ‘good times’ mode where we could spend more and live on debt.
It’s also irritating having to do so in the face of accusations from Tories who we know weren’t exactly warning of a pending financial crash at the time, and indeed were calling for even less regulation, which would have made the financial crash and resulting recession even worse.
So while they regain a reputation for fiscal competence, despite having to revise their own targets continually over the last 18 months, we have to battle to avoid regaining ours for fiscal incontinence, despite not causing the explosion of the deficit in the first place.
Nonetheless that is the price we pay for being in power for 13 years, taking the decisions and getting the plaudits. We soaked up the applause for the biggest school and hospital building programmes since the war. We lapped it up when we introduced tax credits and cut income tax to it’s lowest level in 75 years. Now we have to take the criticism on the chin.
The problem for Labour is those on the right want, and indeed have, turned the debate into one where the argument is that Labour spending caused the crisis, which is simply not the case.
The cause of our public debt
The budget deficit/debt crisis we currently have, which the Coalition government are failing to reduce so spectacularly, occurred for several reasons.
A small part of it was the fiscal stimulus we rightly enacted to ensure the huge drop in private sector output was at least in part made up with public sector activity. This could only ever be a short to medium term measure to ensure growth returned as quickly as possible. Once growth returned spending levels would drop back down to previous levels and below.
A much larger part came from bailing out the banks. This was necessary to protect our savings and mortgages. When the US government let Lehmann Bros go under it nearly drove the entire global economy off a cliff. It was only widespread recapitalisation that saved us, led in no small part by the actions of the British Government with Alistair Darling as Chancellor and Gordon Brown as Prime Minister.
The largest part of the deficit has simply come from the massive drop in tax receipts due to the recession and fall in private sector output, dominated by the banking sector. Whereas the other two reasons I’ve provided were decisions of the Labour government this one would have occurred regardless of who was in charge at the time of the crisis and it makes up the bulk of the increase in the deficit.
The IMF produced a handy graph to show exactly what proportions these make up of public debt, which you can see here.
Where a mea culpa should be offered, it already has, as Ed Balls has repeatedly apologised for our part in failing to properly regulate the banks during our time in office. It doesn’t really matter that there was no desire globally for a global regulatory system while we were in power. Even after the crash banking reform has been painstakingly slow and riven with arguments. We have also acknowledged an over-reliance on tax receipts from the financial sector, which left us exposed when there was a financial sector driven recession.
Quite simply we signed up to the ‘big boom’ of deregulated banking that had occurred in the 1980s under Reagan and Thatcher. We signed up along with the Tories, much of the media and all of the business and financial community. To veer from this was deemed too risky a political strategy. I still believe that doing so would have endangered our re-election prospects. We didn’t spend too much. However, we would have had to make a choice between spending less or taxing more. We fudged that choice and ran a small deficit instead.
We would be right to point the finger at the Tories and say to them that they promised even less regulation than we did, that under them things would be much worse.
But the public are right, I think, not to listen to us until we accept that after ten years of economic growth we should have been running a surplus and not a deficit.
Even though it did not cause the current budget deficit crisis.