Far from being uniformly negative, Labour’s economic record was strong even – and indeed especially – through the final two years as the global economy reeled. Gordon Brown’s analysis of what need to be done at the international level to prevent a continuing crisis was and remains correct.
To apologise and to distance ourselves from those achievements is to allow the coalition Government to define the current situation as Labour’s legacy. It is also bad economics.
The problems of both the British and the global economy remain and require solutions remarkably similar to those which the last Government pursued.
In three key areas, the policy approach adopted between 2007 and May 2010
was right.
First, there were – and still are – profound imbalances in the global economy. China and Germany are saving too much and not spending enough. Their spare reserves which soak up dollar-denominated debt encourage excessive borrowing, particularly in the United States.
The answer does not lie in the pursuit of balanced budgets, nation by nation – a Thatcherite, household economy approach now being forced on the indebted states of southern Europe, as well as the US. The answer lies in a global solution to a global problem, which recognises that the need for action lies as much with countries in surplus as with those in deficit. Labour began to push for that sort of solution in the 2009 G20 meeting in London, but the momentum has been lost.
The second point on which Labour was correct was the recognition that the cause of the deficits in the public sector – in Britain and elsewhere – was not wild excesses of spending but, rather, the weakness of demand. With falling levels of economic activity and employment came falling tax revenues and unavoidable increases in spending on unemployment and other benefits. Much of that increase in the deficit experienced by the Labour Government in its last two years in office was due to a deficiency of growth – not to lavish new spending programmes.
It was a point we tried to explain, but never quite got across. And the point was lost once we began to embrace Treasury orthodoxy which, as always, defined spending as a problem and cuts as the solution.
The fact that we sustained spending for longer than many orthodox advisors wanted explains why the downturn in Britain has so far been less severe than elsewhere. Now, however, the new round of cuts initiated by the coalition Government is beginning to work through and will do damage in an economic environment which, for obvious international reasons, is still fragile.
What was and remains necessary is the achievement of a balance. Income and expenditure cannot stay out of line forever. But the answer lies in generating income through growth, not in cutting just when economic activity needs to be sustained.
The US, after the recent vote in Congress, is now pursuing such a policy. Given America’s crucial global role, the result is likely to be a double-dip downturn, not just in the US but across the world as those whose investments could drive renewed growth look ahead and see only the prospect of a new squeeze on activity as the spending cuts take hold.
The third point on which Labour was right, although too late to make a real difference, was in the belief that growth requires concerted public and private sector action. Industrial activism means using the instruments available to government, including procurement, regional policy and, where necessary, fiscal support to help the sectors which can earn Britain its living in the world in the years to come.
In a global economy where jobs are inevitably migrating as Asia and other regions industrialise, that process becomes all the more important. In its last two years, Labour tried in the face of civil service hostility to argue the case for what was sneeringly dismissed by orthodox economists as “picking winners”.
The foundations were laid and the key sectors – from advanced manufacturing to biotechnology to higher education – were identified. The policy had strong support from many business leaders who recognised that pragmatic co-operation rather than a faith-based belief in market forces is the right approach and actually the basis for economic success in countries such as Germany. But industrial policy takes time, and most of the achievements have been swept away by the emasculation of the Department for Business since the 2011 general election.
The crisis in global financial markets puts all these issues back on the table.
As Gordon Brown argued in a recent article in the Independent on Sunday, the problem in Europe is not about the deficits of particular countries but, rather, the weakness and indebtedness of the European banking system as a whole.
Europe’s problems, like Britain’s, cannot and will not be solved by public spending cuts. They can only be solved by growth. And, for growth, we can no more rely on the free market than Stalin could rely on total government control. Both represent unrealistic approaches driven by ideology. In the face of globalisation, developed economies need industrial strategies which marry public policy and private initiative.
To say that the policies Labour pursued in office remain valid is not to claim that everything we did was right. It wasn’t. But to abandon our views under the illusion that we gain by disassociating ourselves from the past would be a great strategic mistake.
Events are now bringing home to people the direct impact of decisions which initially can seem distant and of limited relevance to ordinary life. Rather than offering cringing apologies, we should be putting forward in every possible way policies which build on what the last Government began and which respond to the real and present dangers which we face.
Nick Butler was formerly senior policy advisor to Gordon Brown
