Labour’s real fiscal record

November 2, 2015


 
Historically Labour governments have been more fiscally “conservative” than Conservative ones.

The current false “truth” endlessly repeated by those who would benefit from its propagation, and by those who should know better, is that Labour governments are fiscally profligate and/or incompetent compared to Conservative governments. In fact the data shows that on balance labour governments historically have been more fiscally “conservative” than Conservative ones.

The financial crisis of 2008/9, with its consequent economic and fiscal fall-out, resulted not from fiscal profligacy but from foolish financial deregulation policies and over-reliance on the finance sector, for which all main political parties were responsible, and which was a problem across most of the western economies. And while the resulting deficit (resulting from actions that prevented a total collapse of the banking system) was the highest as a share of GDP in the post-war period this did not reflect the long term track record of Labour in power. The attempt by the incoming Tory led coalition in 2010 to rapidly shrink the deficit as part of its austerity agenda actually resulted in the slowest economic recovery from any recession in that post-war period, and as a result it proved all but impossible to actually shrink the deficit.

Labour’s track record: Public spending as a proportion of GDP in the UK

If you add up all public expenditure, both revenue and capital spending, you get something called Total Managed Expenditure (TME), its basically the measure of the total size of state spending, and its can be measured as a proportion of total GDP to get a measure of the proportion of the state spending within the economy (note – most of the data in this article was complied by Policy Research in Macroeconomics (PRIME)).

In the UK, since 1972/3 its true that the the highest three years for Total Managed Expenditure (TME) as a share of GDP were from 1974/5 to 1976/7 which occurred under Labour Governments. However, Thatcher’s early governments oversaw the highest sustained 5 year period of public spending as a share of GDP, with public spending that was 46% or more for a record 5 consecutive years, from 1980/81 to 1984/5.

If you take the capital spending out of the public sector equation and just look at revenue expenditure the highest figure as a percentage of GDP was 40.4% in 2009/10 under the Brown government. However, the highest sustained period of current spending was under the Thatcher government, from 1981/2 to 1984/5. Her government also saw a higher level of current spending as a share of GDP for 6 consecutive years than in any year of the 1974/9 Labour government.

UK public expenditure (as shown by OECD and Eurostat data) has been consistently below the EU average as a share of GDP – the list is topped as one would expect by Scandinavian countries but the UK is also below Germany as well as France, for example. The UK is roughly on a par (on this indicator) with Poland.

The UK level of public spending as a proportion has actually been low compared to similar size countries in Europe for decades. Note how public expenditure surged everywhere after the financial crisis and how the UK public spending is still comparatively low

 

Its true that in the UK, since 1972/3 the highest three years for Total Managed Expenditure (TME) were under a Labour Government from 1974/5 to 1976/7 with 47%, 48.9%and 47.8% before it slipped back to 44.1% in the last year of the Labour government, and to 43.7% in 1979/80. However, it was Thatcher’s early governments that saw the highest sustained 5 year period of public spending as a share of GDP – she oversaw public spending that was 46% or more for a record 5 consecutive years, from 1980/81 to 1984/5: 46%, 46.4%, 46.9%, 46.6%, 46.3%, before it fell back to 44% in 1985/6

The highest level since then was at the peak of the financial crisis on 2008/10, with TME reaching 45.7% in 2009/10.

As regards UK public sector current spending (i.e. excluding capital spending), the highest figure as a percentage of GDP was 40.4% in 2009/10 (at the beginning of the deep recession after the financial crisis). However, the highest sustained period of current spending was again achieved by Mrs Thatcher’s government, from 1981/2 to 1984/5, with 40.1%, 40.3%, 39.9% and 40% and Mrs Thatcher’s government had a higher level of current spending as a percentage of GDP for 6 consecutive years, starting in 1981/2, than in any year at all of the Wilson/Callaghan government (highest level, 38.3%).

So the data shows conclusively that Thatcher’s early governments were for 5 or 6 years, by a reasonable margin, the highest spending ones of any government, taking both TME and current spending into account, over the whole period to the present.

Labour’s track record: Budget Deficits

Another way to measure the balance of public spending in the economy is to measure the deficit or surplus of the government budget. This is the measure favoured by the Tories and reducing the budget deficit is constantly presented as being crucial to economic well being and the Labour Party is constantly presented as being systemically prone to running dangerously high deficits. But this is not supported by the data.

Looking at current budget deficits or surpluses (i.e. excluding public investment), for the period from 1956 to 2008, Conservative governments had an average annual surplus of 0.3% of GDP, while Labour governments had an average annual surplus of 1.1%.

For the period starting 1970/1, in the case of Conservative governments, the average annual current deficit for this period is 0.6% of GDP, while for Labour governments over the same period, the average current budget deficit is 0.3% of GDP.

Looking at overall budget deficits (i.e. including public investment) for the period 1970/1 to 2008, for Conservative governments, over this period the average annual overall deficit is 2.9% of GDP, while for Labour governments in the same period, the average overall deficit is 2.6% of GDP.

If you look at the entire record from 1956 (when the dataset from the Office for National Statistics starts) governments of both political parties on average, and over the long-run period, deliver protracted current budget surplus. This is largely due to the fact that in the more stable (Bretton Woods) era before the 1970s and financial liberalisation, all governments almost always achieved a current surplus (but with high levels of public investment), while surpluses became much rarer in the more volatile post Bretton Woods era of financial deregulation.

Conservative governments have an average annual surplus of 0.3% of GDP over the 53 year period to 2008, while Labour governments have an average annual surplus of 1.1%.

If you take the data from the post Bretton Woods era, 1971 to 2008, over this period, both Conservative and Labour governments have run on average a small current budget deficit. In the case of Conservative governments, the average annual current deficit for this period is 0.6% of GDP, while for Labour governments over the same period, the average current budget deficit is 0.3% of GDP.

Therefore, using the size of budget deficits as the indicator (and its the indicator that has been favoured in recent Tory discourse), it is fair to say that Labour governments, over many years, have been somewhat more “fiscally conservative” than Conservative governments.

Public Debt

Yet another way to measure the size of public debt is to look at the total government debt compared to annual GDP. Taking the period 1974 to 2008, the level of net debt as a share of GDP has fluctuated under both Conservative and Labour governments (with a bigger fall under the 1979-97 Conservative government), but net debt as a percentage of GDP was lower at the end than at the start under each government, including the 1997 Labour government up till 2008.

Note how public debt as a percentage of GDP was on the low side and unexceptional under the New Labour government until it started to grow rapidly after the financial crisis as a result of both bailing out the banks and because of the adverse impact on public finances of the deep post crisis recession.

 
Once the financial crisis hit, the ratio worsened significantly, so that by the end of the Labour government, the debt to GDP ratio was some 25 percentage points higher than at the outset in 1997. However under the 2010-2015 Tory led Coalition government, and its ‘austerity program’, the debt to GDP ratio actually rose further by around another 18 percentage points. However the UK level of debt to GDP is not particularly unusual compared to other comparable national economies. Even the recent unusually elevated level of public debt to GDP ratio in the UK was topped by much larger public debt to GDP ratios in Italy and Japan and was more less the same as the debt ratios in France and Spain.

UK public debt was actually lower than other similar developed economies up until the financial crisis of 2008 after which it grows. Note also how high Italian and Japanese debt is, and how French debt levels are consistently higher than the UK's debt levels. The level of UK public debt is not unusual. The real outlier is Germany which has retained low levels of public debt even after the onset of the financial crisis, a factor which has contributed significantly to deflation and stagnation in the eurozone.

 
In the first year of the 1974-9 Labour government, UK net public debt stood at 55.8% of GDP, down from over 200% at the end of the 2nd World War. At the end of 1978/9, net debt was down to 49%, a fall of 6.8%. During Mrs Thatcher’s government, net debt fell steadily, then (during the Lawson boom) rapidly, to a record low of 24.2% of GDP in 1990/91. When the Lawson boom turned to bust, followed by the forced exit from the ERM, the debt to GDP ratio climbed rapidly again till the end of the Major government, when it reached 39.9% of GDP in 1996/7. Under the Blair-Brown governments, the debt to GDP ratio first fell back to 29.4%, then rose back to 36.9% in 2007/8 i.e. just before the global financial crash struck. Thus until the financial crisis, debt to GDP under Labour was always lower than the level “inherited” at the end of 18 years of Conservative government.

The financial crisis of course changed this dramatically, with debt to GDP reaching 49% in 2008/9 and 62.2% by the end of 2009/10. Under the Conservative-Liberal Coalition, it rose to 80.8% of GDP by the end of 2014/5.

When considering the burden of national debt it is important to look at the cost of servicing that debt, which means looking at how much of national GDP has to be spent paying interest on outstanding public debt (i.e paying interest to people who own UK government bonds – Gilts). The amount of interest paid is a function of both the total volume of debt and the interest rates being paid on the debt. Taking the amount of annual debt interest payments (the cost of public borrowing) as a share of GDP since 1964, interest payments of public debt peaked under the 1979-97 Conservative government at 3.5%, and were lowest under the 1997-2010 Labour government at 2.3% of GDP. With the increase in public debt since 2009, this increased to 2.9% of GDP under the Coalition government. Annual debt interest payments as a percentage of GDP, these have varied between 1.8% and 4.3%. The highest levels of interest as a percentage of GDP were during Mrs Thatcher’s government, when for 6 consecutive years, interest payments were over 4% of GDP.

The average annual debt interest payments as a percentage of GDP per government since 1964 are as follows:

Average annual debt interest payments as a percentage of GDP
PeriodGoverning PartiesDebt repayment as % of GDP
1964-70Labour2.8%
1970-74Conservative2.5%
1974-79Labour2.9%
1979-97Conservative3.5%
1997-2010Labour2.3%
2010-15Con-Lib Coalition2.9%

Therefore, despite the increase in net debt since the financial crisis, debt interest payments as a share of GDP have remained at a level that is not high by historic standards, and is considerably lower than under Mrs Thatcher’s government (which of course was during a period of generally high interest rates). This is largely the result of the very low interest rates currently prevalent in the UK (and across most of the developed economies) which means this is an ideal time to be borrowing money, when the cost of doing so is very low.


 

Keynes said in 1933:

Even if you take the Budget as your test, the criterion of whether the economy would be useful or not is the state of employment…I do not believe that measures which truly enrich the country will injure the public credit…It is the burden of unemployment and the decline in the national income which are upsetting the Budget. Look after the unemployment, and the Budget will look after itself.

Of course today, in a country like the UK that has seen a collapse in the power of organised labour and where casualised, low paid, fragmented and often partial employment is widespread, it is not only about employment but also about building an economy that can deliver decent employment at decent rates of pay. In the UK real wages have declined by some 8% in real terms since the crisis, and wages have only just started to recover recently. Inflation in the UK, and indeed across Europe, is almost non-existent and interest rates historically are very, very low, so running a deficit and borrowing money to increase economic activity, employment and investment is perfectly sensible. If the economy grows, and grows consistently over time, the public budget will look after itself.

After the 2010 defeat the new Labour leadership under Millband rushed to distance itself from the record of New Labour and in the process by default found itself legitimising the Tory narrative of blaming Labour for running up a national debt and causing a dangerously large deficit through profligate spending. In the process the fact that the real responsibility for the financial crisis lay with reckless bankers, and a deeply flawed financial system, was almost completely obscured. Labour thus fell into a political trap from which it is still trying to extricate itself.

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