The following blog has been put on Left Foot Forward. Written by Michael Burke it examines the myth that Labour's spending caused the financial crisis, and shows that was not the case. The blog was produced as a result of discussion at the New Political Economy Network on Monday. I am a member of that group.
"Backers of the coalition often say that New Labour taxed and spent profligately, however the chart below, using Treasury data, shows this assertion to be factually incorrect. Until the ‘Great Recession' New Labour spent less as a proportion of GDP than Thatcher did. The cause of any deficits over New Labour's terms of office was a result of taxing at a much lower rate than Thatcher did.
As the chart clearly shows both spending and taxation were lower under the New Labour years than under Thatcher. The table below shows the average spending and taxation receipts over the period, as a proportion of GDP:
| Average expenditure and taxation receipts, % GDP, 1978/79-2009/10 |
| Average expenditure, % GDP | Average taxation receipts, % GDP |
| Callaghan 1978/79* |
45.6 | 41.3 |
| Thatcher 1979/80-1990/91 |
44.2 | 42.0 |
| Major 1991/92-1996/97 |
42.1 | 36.6 |
| Blair 1997/98-2006/07 |
38.7 | 37.5 |
| Brown 2007/08-2009/10 |
44.2 | 37.4 |
| Source: UK Treasury, Public Finances Databank (Tables B2 & C1); * Last year only |
Before the ‘Great Recession', New Labour had by some margin the lowest level of public spending of any of the governments identified. Even during the Brown premiership — which coincided with the deepest recession in the post-WWII period — spending only rose to the same average level as under Thatcher. Taxation receipts were also considerably lower.
Of course under Mr Brown the sharp decline in the level of GDP produces a declining denominator which magnifies both tax and spending as a proportion, while the economic effects automatically reinforce that effect — spending rises (welfare, etc) and tax revenues fall. New Labour taxed and spent much less than Thatcher."
I might add that this might, of course, precisely define the problem with New Labour. In particular, its tax cuts were profligate for no gain.
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This is weak analysis. Firstly, it is too convenient to start at 1978-9. If you look at the figures in the mid 1970s tax and spending as a % of GDP was even higher. So Thatcher was cutting from a higher base. The nadir of public spending in 1999 came at the end of a long downward trend that had been in progress almost 20 years – well before Labour entered office in 1997.
Secondly, he uses the recession of 2010 to explain that tax and spending is magnified because the demoninator (GDP) is decreasing. But he fails to mention this can also be applied to Thatcher in 1980-2. There is a spike in the graph at the time due to the recession in that period. Applying his “magnifying effect” rationale to the Brown recession but not the Thatcher one is either intellectual dishonesty or him not being very clever.
Thirdly, between 1999 and 2008 government spending rose considerably but tax receipts were broadly static. In other words, the Labour government were running a large budget deficit at a time of boom. That is what was stupid. And that’s why we’re in the mess we’re in now.
Thirdly, if
There’s surely an observation to be made here about the ‘direction of travel’?
Essentially during Thatcher’s time in office spending & taxation* were on a clear downward trajectory and notwithstanding the uptick between 90-92 (which I’m assuming Keynesians would regard as the right response to the recession at the time) that trajectory continued in the later Major years. Post ’97 that spending trend reversed and, as you point out, the revenue more or less flatlined. It’s that widening gap at the far right of the graph which justifies some of the criticism of New Labour (not the hyperbolic ‘spending splurge’ nonsense but the charge of imbalance and imprudence).
I’d argue that had New Labour introduced taxation policy to try & get that revenue line to ‘keep pace’ with the spending they wouldn’t have been anywhere near as successful electorally. That’s supposition on my part but given New Labour’s lengthy time in office (relative to prev Labour govts) that doesn’t seem unreasonable.
This chart seems to nail the absurd lie (if it ever needed nailing) that the reason for recession was Labour’s profligate spending rather than the banking crisis.
It’s quite amusing seeing these hypocrites taunt Labour for a crisis that was little to do with them, yet fawn over bankers who leveraged themselves to the hilt to the tune of hundreds of billions of pounds with securities created from the US sub-prime housing market and whose profligacy almost broke the banking system entirely, then begged the government: “can we have some money, please?” Unfortunately, Brown stupidly obliged, propping up banks that should have been allowed to crash.
Isn’t it grand of the tories to make the taxpayer pay for a crisis twice over for somethng private institutions caused by their greed and stupidity? And, what’s more, has not drawn up any legislation whatsoever to tame the banks, allowing them to get away with doing it all over again?
And who will be called upon yet again to clear up the mess when the inevitable happens?
Three guesses!
Could it also be because although labour spent more and more ( rightly some might say, the GDP ration was falling because we had continuous growth of about 4% and inflation of 2% leaving real GDP growth to be around 2% year on year, and a better management of the economy lead to smaller %of GDP spending while delivering better and better services.
I’m not saying it was perfect far from it but it was clearly good, and maybe relied to heavily on automatic stabilisers so that when the Banks collapsed and the world economy revived by Brown, the %of GDP increased sharply as GDP fell, by vast amounts quarter on quarter, tax revenues fell massively and all those previously paying taxes now claiming benefits forced a huge shift in tax/spending. To claim this is structural and not cyclical is a sham.
The greatest tool of reliving a country of debt is growth, and a way to reduce a deficit or to make it a sustainable deficit (less that the real GDP growth rate) is to get the economy moving again pump up demand and get some supply-side policies going, in an economy where nobody is willing to but, nobody is willing to invest, and in an economy where nobody is willing to invest nobody is able to buy.
There are cuts that could be made, there are taxes that should be claimed, there is a need for increased efficiency and a more stable and resilient economy, but cutting your way out of a hole, is like digging out of it, your only going to stay at the same level or go down, but if you grow that hole appears a lot smaller and eventually there will be no hole left to talk about.