Members of the coalition Government love repeating their mantra about pulling Britain back from the brink of bankruptcy. Ministers insist that the economic crisis was caused by reckless spending and excessive borrowing. But that’s not a claim they can back up. Nor can the coalition support the assertion that there is no alternative to the path on which it has embarked. It’s time to tackle these myths head-on. Let’s start by looking at the picture before the global financial crisis hit.
First, debt. In 2007, International Monetary Fund figures show that British government debt as a proportion of gross domestic product was below that of France, Germany, the United States, Japan and even Switzerland. In 2013, it is still forecast to be below that of France, the US and Japan. There was no “decade of debt”. That is a Tory myth. In fact, Labour had been paying off debt. Public sector net debt fell from 42 per cent of GDP in 1996-97 to 36 per cent in 2006-07. That 6 per cent reduction is worth some £90 billion today. By bringing down government debt, we effectively saved the taxpayer about £3 billion in annual interest payments. We did indeed fix the roof when the sun was shining.
Second, government spending. Coalition ministers like to pretend Labour was the last of the big spenders. But in 2007, British government spending as a proportion of GDP was lower than that in France, Germany, the Netherlands, Norway and Sweden. Our non age-related social spending as a proportion of GDP was lower than the European Union average. Our education spending was almost identical to the Organisation for Economic Co-operation and Development average of 5.7 per cent. Our health service spending the following year, 2008, was 7.2 per cent of GDP, compared to 8.7 per cent in Germany and 8.1 per cent in France. So much for
“overspending”.
The previous Labour Government did not behave like a pools winner and “spend and spend and spend”. If we had done, the Tories would never have accepted our spending plans. But they did. Until November 2008, they undertook to abide by Labour’s public spending plans up to 2010. Sometimes they demanded we spend more, while the Liberal Democrats demanded we spend more all the time.
Third, annual government borrowing. Britain was not a particularly big borrower before the global financial crisis. In relation to GDP, government borrowing in 2007-08 was far lower than in the Tories’ last year in office 1996-97, when Ken Clarke was at the Treasury – 2.4 per cent compared to the 3.4 per cent we inherited from John Major’s Conservative Government. And Labour’s borrowing helped to pay for a much higher level of public investment – four times as high, in fact.
Before the global credit crunch, Labour borrowed mainly to invest, whereas, in their last year in office, the Tories borrowed mainly to meet their weekly wages and benefits bills. In 1996-97, 80 per cent of what the Tory Government borrowed went to pay the running costs of public services, not to finance new schools and hospitals or to develop Britain’s road and rail networks.
Since the financial crisis, British government spending as a share of GDP has risen by more than 5 per cent. Much of that extra spending was automatic as firms cut back and unemployment rose. Some of it – less than 2 per cent of GDP – was discretionary and temporary, in the form of the 2009 fiscal stimulus when the economy was at its weakest. Some of it was in the form of public sector capital investment programmes brought forward from future years. We raised net public investment from £27 billion in 2006-07 to £49 billion in 2009-10 – higher than in any year over the past four decades. But most of it was the direct cost of bailing out the banks – about £90 billion up to June of this year – which was essential to prevent a total collapse of the financial system and by far the biggest cause of the deficit.
Borrowing was certainly not “out of control”. The Office for Budget Responsibility reckoned that borrowing last year (2009-10) would come out over £10 billion lower than Labour had forecast and £8 billion lower in the present year. Unemployment has stayed lower than many forecasters expected and the economy had started to grow again by the end of last year. Recovery was fragile but real in the run-up to the 2010 general election.
That was then. But what about now? Did Labour lose control of spending and borrowing in response to the credit crunch? The short answer is: certainly not. What we did do was boost public spending to offset the collapse in private spending as firms and households cut back on business investment and consumer spending. This extra public spending, coupled with the loss of tax revenue as output, profits and employment fell, led to much higher government borrowing. It is that extra borrowing – the much maligned deficit – which has kept the economy afloat in the face of the worst downturn since the 1930s. Without it, the financial crisis could have led to a financial collapse and recession could have turned into depression. The IMF has acknowledged that the worldwide increase in government borrowing since the 2008 credit crunch staved off an economic catastrophe. It did in Britain.
The truth is that the coalition Government is exaggerating claims about the state of public finances in order to impose ideologically-driven, deep and savage cuts, which will do great damage, not just to public services and jobs, but the economy.
Peter Hain is Shadow Secretary of State for Wales and Labour MP for Neath
