You might very well think so, I couldn’t possibly comment

In the Times on 6 January 2011, Ed Miliband claimed that the budget deficit was not caused by the last government spending too much money.

I have blogged and tweeted enough about this topic generally as well as the game of “bash the bankers” (see PS below), but I am “physiologically retentive” about these things and cannot let such a bold claim pass without challenge.

So let us see the numbers & facts….

Labour came to power in 1997, it carried on with the Tory spending plans and ran balanced or surplus budgets from 1997 to 2002. This enabled the then government to reduce the National Debt from £348 billion in 1997 to £315 billion in 2002. Fabulously sensible and what many other leading nations were doing.

Blair won his second term as PM in 2001/2 and the over-spending started. From 02/03 to 07/08, when tax take was rising every year, the government spent in excess of its income and therefore borrowed to spend (annual budget deficit). People have argued why Blair/Brown overspent: “to invest in infrastructures destroyed by the Tories” was one view but I am not going into dwell on this.

Before the banking crash in 2008, the Labour government accumulated total annual budget deficits of over £200 billion (hereinafter called “the Overspend”).  Therefore, the National Debt increased from £315 billion in 02/03 to £525 billion by 07/08. (Note: a cool £1.5 Trillion worth of PFI liabilities & public sector pension deficits are ON TOP)

During all this time, the government undertook “light-touch” regulation (<-an excellent article written by socialists about Brown’s massive failure in his stewardship of the economy) of the City & banks, risks were encouraged on lending and investment banking, tax avoidance schemes were left unchallenged. {Note: In 2005 Arcadia (Topshop) paid a £1.2 billion dividend to Green’s wife in Monaco and Green himself was knighted in 2006}.

Brown did not abolish “boom & bust” as he alleged, he & Balls actively encouraged it. They loved every penny of the 14% of total tax revenue the City was producing for government spending plans, which included massive injection of cash into public sector and welfare benefits. It encouraged welfare dependency by some people.

City Regulation was lax, lending control was light, credit was easy and complex collateral derivatives (poison infused with toxin inside a bomb) became common place in investment banking.

Many people took huge risks with personal borrowing, 100% or 105% mortgages; we weren’t complaining about “the bloody bankers” when they lent to us (too easily), now we moan they don’t lend enough after being bailed out by the Labour Government, oh the irony.

Personal debt grew to gigantic proportions, the financial services and property bubbles got bigger and bigger. It was an unsustainable model and bound to crash. The government did not control it, Brown said he had abolished boom & bust. I didn’t believe him.

Brown has now admitted there should have been tighter regulation of financial services. Even Blair admitted in his book that the government should have reined in public spending from 2005 onwards.

The Times said on 7 January 2011:

According to the OECD, the UK in 2007 — in other words, before the financial crisis — had the largest structural budget deficit in the G7. At 48 per cent, the proportion of GDP now spent by the Government is the highest it has been since 1982.

But instead of taking heed of the overheated state of the economy and the fact that bust always follows boom, the Government/Treasury continued to forecast increasing tax take and continued to spend.

Then the bubbles exploded in spectacular fashion in 2008 (as they ALWAYS do).

The government was caught with the worst case scenario comprising of 3 things – (1) unsustainable public spending from loans, (2) a high level of National Debt and (3) a large annual structural budget deficit, the last 2 of which resulted from years of overspending. The country found herself in a MUCH WORSE position than she would have been in had the Overspend not been so high and went on for so long. After the crash, the annual deficit shot up as the government borrowed huge sums to shore up public finances and carry on spending as tax revenues collapsed in 08/09/10.

According to the IFS:

Over the same ten years (97 to 07), the vast majority of other leading industrial countries reduced their borrowing by more than the UK. And most also reduced their debt by more.

Had we reduced our borrowing (or even God forbid, not borrowed during the boom years) AND paid back more National Debt like most other leading industrial countries, we would have been much better prepared for the economic maelstrom that ensued. There might even be some money left and no need for the last Chief Secretary to the Treasury to write his infamous note to David Laws in May 2010.

Further, had the Overspend not happened, our National Debt would be about £200 billion less than the current approx total of over £1 TRILLION, and the country would be paying less debt interest. We paid about £43 billion in debt interest in 2010; if our debt had been £200 billion less, our debt interest would nominally be about £8 billion less. Think about that.  £43 billion is more than what we spend on Defence. Even £8 billion is an awful lot of money. And our budget deficit would not be as high as the current £150 billion per annum.

The people, especially those who had over-extended their (too easy) credit found themselves in trouble as the economy contracted. The government and the country have been living beyond their means for a decade, our debts – national, companies, personal – pushed UK to become the most indebted nation of all the big economies.  The readjustment will be painful and unavoidable. There will be more pain as spending cuts are inevitable, the only difference between the two main political parties is how deep and fast the cuts should be and the Coalition is not cutting twice as fast or as deep, that is a Ed Balls smoke & mirror trick.  And for those who say the Tories were in agreement with Labour spending plans until 2008, I say yes they did but which party was IN GOVERNMENT? You can’t shift or abdicate the accountability, Labour was meant to be in charge of the country, us and the banks.

Now Labour says Keynesian economics should be put in play ie “spend in recession”, that is strange because the last government did not believe in the other half of Keynes ie “save in a boom”…

So was Ed Miliband correct when he said the “budget deficit was not caused by the last government spending too much money”? Yes he was partly correct because he chose his words very carefully. A large chunk of the budget deficit is mainly down to the borrowing caused by collapse of tax revenues since the banking crash. But quite a bit of that, approx 70/75%, is down to structural deficit (£100 billion?) which does not reduce even if growth picks up. Also, he conveniently did not expand or explain what led up to that crash. May be he should and then he can move on.

So was the last Labour government largely accountable, by its policies, actions, omissions and lack of control of or indeed fanning the markets (banking, consumer credit & property bubbles) for this country’s current financial situation and the pain people now have to endure during the inevitable economic correction?  Did Labour fail to create a balanced economy that didn’t rely so heavily on the City? Did Labour spend all its money wisely or make plenty of costly mistakes (IT projects, PFI projects)?

You might very well think so, I couldn’t possibly comment…

Art Li

*Update* Dec 2011, The Report into the collapse of RBS has firmly blamed the last government, and in particular Blair, Brown, Balls & Goodwin for the parts they all played.

PS. I want to add an aside – of course it was in Ed Miliband’s interest to “blame the bankers”; after all, it is easy to try & shift accountability and flame the green-eyed monster whilst talking about the enormous £7 billion bonus pot proposed by the City & banks, okay it is a lot of money and I do not have a problem with the special bank levies of about £9 billion over the next 4 years. But let us remember, out of the £7 billion bonus pot this year, HMRC (ie we) will get about £4 billion in tax and National Insurance contributions, plus VAT and stamp duty on the luxury cars or riverside pads purchased with the net bonuses. What is wrong with that? If the banks don’t pay bonuses and instead pay Corporation tax (28%) on the “higher taxable profits”, HMRC would get about half the tax, ie only about £2 billion.

Of course, some will say the government should limit bonuses and pay. Okay, let’s slap 75% and 90% tax on income and bonus payments over £150K and £200K respectively, plus impose 54% (from 27%) corporation tax on all companies and close all tax havens used by non-dom individuals and off-shore companies to invest in this country. What will happen is that we will lose the single biggest source of tax and overseas income when the financial service industry and big businesses leave the UK en masse for friendly tax regimes (it will take a half decent lawyer only half an hour to change HQ address). We then get even more severe cuts to public spending as tax/VAT revenue collapses…. The City & big businesses are one big Golden Goose; by all means pen it in a bit more and take a bit more but we strangle it at our own peril.

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About Art Li

Briefly, I am a lawyer, keen amateur photographer, dog lover and politics junkie but not a member of any party. Full details on Biography page. Follow me on Twitter @Art_Li.
This entry was posted in Coalition Government, CSR, Labour, Politics, Tax, Trade Union, Ukuncut. Bookmark the permalink.

4 Responses to You might very well think so, I couldn’t possibly comment

  1. felipewh says:

    What an excellent summary. The problem is that the banks’ irresponsibility and Labour’s overspend are not mutually exclusive explanations – they were both causes. Behaviourally, Gordon Brown and certain investment banks were identical: pursuing short-term selfish ambitions while and by piling long-term debt on to the country. The errors of the banks and of Labour don’t cancel each other out – they add to each other.

  2. Nice analysis and I learned a lot on the roots of the problems created by Governmental overspending. But some doubts arise! The overspending by the Government and similar issues came to the forefront only after the recession hit UK badly. Though recession had its roots in the US, they are fast on the recovery path, and countries like UK are slower, especially in terms of employment. Why so?

  3. Davembruce says:

    Very well written Art_Li .. Some very good arguments set with facts and figures

  4. james c says:

    The huge budget deficit was caused by the private sector suddenly deciding it had too much debt and de-leveraging. The surplus of the private sector has, by arithmetic, to be offset by deficits elsewhere.

    The UK was hit hard due to its large reliance on the financial sector for growth.

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