An economic defence of Gordon Brown

The more I think about Chris Dillow’s formulation of right-wing “small truths, big errors” the more I like it.

The tendency of those on the right to “use the small truth to obfuscate the big one”, as Dillow puts it, is almost endemic. He notes four good examples in his original blog and another here. Here’s one I spotted.

But the ripest red herring of all has to be the right-wing argument that Gordon Brown went on a spending splurge between 2007-2010 leaving us with the biggest deficit in the OECD and public spending at 51 per cent of GDP.

There is a small truth here. Gordon Brown was running a 3 per cent deficit in 2007-08. That was certainly a mistake in retrospect. The Government should have been running a surplus in those years of plenty.  That would have left the national finances in a much better position to weather the credit crisis and subsequent downturn.

But the reason Britain ended up with a £158.9bn deficit (11.4 per cent of GDP) in 2009-10 is not, contrary to what one hears from the Conservative propaganda machine, that the Government went on some sort of mad spending spree.

The economist Giles Wilkes*, in his brilliant Centre Forum paper (page 38/39), performed an analysis of the origins of that projected national debt in 2012-13. He tried to work out what proportion of the debt was due to Brown’s policy errors and what proportion due to the unavoidable** effects of the recession.

Here’s his conclusion:

“In increasing order of significance, the [projected] debt for 2012-13 can be explained by:

about 4 per cent from increases in spending stemming from the recession, most of the automatic responses via the benefits system

about 9 per cent from the banking rescues

another 9 per cent from over-reliance on volatile ‘bubble’ revenues

about 16 per cent from the government failing to fix the structural deficit

about 25 per cent from a loss in revenues from the recession, which includes those deliberately foregone through the VAT cut

the rest (about 37 per cent) from the debt that would existed had there been neither a recession nor a structural deficit.”

This doesn’t let Brown off the hook for over-spending. 16 per cent of the debt can be roughly attributed to that structural deficit. But it puts it in some crucial context. 47 per cent in the debt has nothing to do with Brown’s spending, but results from a collapse in tax revenues as the economy stalled, the bank bailout, automatic stabilisers etc.

Now those foregone revenues include the VAT tax cut, which was a deliberate policy choice by Brown and Darling. And it can reasonably argued that the Government was over reliant, like the Irish government, on revenues from an overheating property market and a financial bubble.

But there is no reason for us to believe that a Conservative Government would have been any less reliant on those bubble revenues. George Osborne was still committed to backing Brown’s spending plans until autumn 2008. Remember the Tory slogan “sharing the proceeds of growth“? They too behaved as if the bubble party would go on forever.

What all this should tell is: don’t fall for the Conservative “big error” that Brown overspent and ruined the public finances, or that this was a crisis born of public profligacy . Britain’s national finances have been ruined by a toxic combination of private sector stupidity and a failure of the public sector to rein in those animal spirits. Brown’s sins were of omission, not commission.

*Giles also explained his calculations in this blog for Liberal Conspiracy

** Those who think the Government should have let the banks go bust or slashed spending as tax revenues dwindled should probably read no further

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• jobsagoodin

  ‘But the ripest red herring of all has to be the right-wing argument that Gordon Brown went on a spending splurge between 2007-2010′

  It’s a much bigger truth if you allow for the fact Brown went on a spending spree post 2001 not 2007. Do the figures you quote allow for this or only for his spending after 2007 ?

• jobsagoodin

  ‘Britain’s national finances have been ruined by a toxic combination of private sector stupidity and a failure of the public sector to rein in those animal spirits.’

  I think you’ll find there was no greater stupidity than believing you’d ended boom and bust and spending accordingly.

• jobsagoodin

  ‘Remember the Tory slogan “sharing the proceeds of growth“? ‘

  The thing I remember is that for 9 years post 2001 the Tories accused Labour of being too profligate with public spending and they were proved to be completely correct. Hard pill for you to swallow I can tell.

• Michael Ernest Corby

  What the Conservatives may or may not have done is irrelevant. It happened on brown’s watch — he was on captain on the bridge.

  When Labour came to power they inherited and excellent economy: when they left it was in a mess.

  Why did the banks need bailing out? Answer because of the enrichez vous policies of Nu-Labour.

  Brown took the credit for the Conservative inheritance he has to take the blame for the mess.

• JohnJustice

  That 3% deficit was simply about restoring our public services after years of neglect. This was much the better option in my opinion compared with running a surplus against a once in a generation financial crisis that no one predicted.

  Of course, for those who do not depend on those services to live a decent life any kind of increase in public spending is a waste of money.

• 2barrows

  I think that you are correct, and the quoted paper therefore just increases the obfuscation.

  Net debt was £350 bn in 1997/8 and after 2001 it was increased by an average budget deficit of £30bn+ per year, reaching a net debt of £498 bn in 2006/7, so £150bn extra debt was added before the credit crunch began in 2007.

  The deficit from 2001 gets a passing reference here (p19) “From 2001, the Labour government started enjoying lower legacy borrowing costs. This gave them 1-2 per cent more fiscal leeway than the Conservatives had in the 1980s. Labour reaped the rewards of the Conservatives’ earlier austerity by starting to run a primary deficit to fulfil their ambitions for higher public spending.

  But here the deficit has metamorphised (p 32) “But from 2001, the surplus dropped. It reflected a conscious political choice to divert resources to the public sector – but without raising tax revenues to pay.” Too right the “surplus dropped”: it actually was an average £30bn pa deficit!

  But look at this (p 19 again): Furthermore, by making the Bank of England independent they lowered borrowing rates by a further 2-3 per cent, a factor of massive significance given the quantities of debt to be issued over the next fifteen years.” That’s all right then. Thank goodness Gordon introduced the flawed tripartite system to permit the creation of all the funny-money credit which financed the boom so cheaply! Pity about the bust, though.

• 1thomas_boxer4

  Gordon wasn’t alone there was a prime minister who could walk on water which was just as well as the good ship Britanica has now got so many passengers it’s sinking. However given that Big Tony and gruesome Gordon lived next door and never spoke it’s hardly suprising so much of our wealth past , present and future is wasted.

• omasta

  Is it about the private sector stupidity or the fact that free market is no longer free of ingrained flaws of catastrophic dimensions the way communism economy was?

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