That Labour was 23 per cent ahead of the Conservatives at the recent general election on the issue of economic competence was the main reason the Conservatives did not do better. Moreover, Labour fought and won the election almost entirely on its claimed economic credentials. In practice, the claim was Labour’s only real political asset and on nearly all other issues it was clearly unpopular.
Yet, as the next few years are likely to show, Labour’s favourable economic credentials are not justified and can be expected to dissipate. I believe that the Conservatives were mistaken not to have attacked Labour on the economy in the election campaign. Gordon Brown’s economic propaganda effectively won the argument by default and at a time when the consumption data suggested that people’s economic confidence was declining.
Although inflation and interest rates stayed low and growth remained positive throughout the 1997-2005 period, Labour’s management of the economy was not the main reason for this and it was, in reality, both damaging and negative for the economic outlook. Brown’s self-made reputation was little more than the result of the economic legacy he inherited (and particularly the supply-side reforms of the 1980s), globalisation and the completion of the process, started by Norman Lamont, of handing monetary policy to the Bank of England.
In the territories left to Gordon Brown, what he did was mostly unhelpful. He complicated the tax system; the operation of his tax credits have proved the shambles of which I have given warning; he has presided over falling productivity growth and Britain’s declining international competitiveness, largely the result of the significant transfer of resources from the private to the public sector.
Brown’s record of managing public expenditure has been dire. In money terms, between 1997 and 2005 he increased public sector spending by 65 per cent, but achieved only a 16 per cent increase in delivery. On Office for National Statistics data, 84 per cent of all the extra spending was lost in public sector inflation, which rose from 1.6 per cent a year to 10 per cent. Public sector productivity fell by 10 per cent. Most of the extra spending went in higher pay and unproductive, increased public sector employment. Public sector pay, level by level, is now some 20 per cent higher than private sector pay (not allowing for better public sector pensions); of nearly a million additional people employed in the public sector, only some 150,000 are in frontline service delivery — teachers, doctors, nurses and police.
Brown’s transfer of economic resources from the private to the public sector — approaching 5 per cent of GDP as estimated by the Organisation for Economic Co-operation and Development after allowing for his changes in the basis of reporting and accounting — together with the additional tax take have, moreover, served to reduce the UK’s growth potential, as the Treasury forecasts for the next five years demonstrate.
It has been ironic that while Brown has been damaging British competitiveness and reducing growth potential, continental Europe, in particular Germany, has been addressing its economic problems and improving its competitiveness. Within the EU, it has been Britain that has experienced the worst relative deterioration in its public finances, swinging from a 3 per cent surplus to a 3 per cent structural deficit. As some have observed, Britain’s “economic miracle” claimed by Gordon Brown’s propaganda has constituted little more than a prolonged, traditional Keynesian, consumer boom, fuelled by increased private and public sector borrowing. Household demand has risen 3 per cent since 1997 and now represents 64.2 per cent of GDP.
I am particularly surprised that Brown appears to have taken in some economists with his Golden Rule nonsense. My criticisms are not just about fiddling the figures and changing the start or end dates of economic cycles; or the fundamental defect that the rule entails no constraints on either the total level of public spending or the total tax burden. The key nonsense is that it has accommodated a transformation of the overall budget balance from surplus to large-scale borrowing, during a period of steady economic growth and as the economy has moved towards full capacity.
Governments should borrow when there is economic slack to stimulate the taking up of underutilised resources, but when economies are at, or close to, full capacity, the public finances should be in balance or surplus. Brown was running surpluses when there was slack capacity, but now the economy is accepted as being close to full capacity, he has built up a substantial structural deficit of some £35 billion. The Golden Rule’s proposition that for other than capital spending, the public finances should be in balance over a full economic cycle, only makes sense on the basis that over the cycle there are deficits when there is spare capacity in the economy but surpluses when the economy is at full capacity. Brown’s management has achieved the reverse.
Looking forward, it is clear that the UK has run out of scope to improve its economic growth in the short term with more increases in the public sector deficit or in the numbers of public sector employees. The issue is how to get rid of the structural deficit without risking inducing a recession. It is also clear that, for the time being, consumers feel relatively fully borrowed and are looking to degear, to protect themselves against possible higher inflation and higher interest rates.
The reality is that just when the economic prospects for the German economy are picking up, after a near 10 per cent reduction in German unit labour costs over the past seven years and with further prospective supply-side reforms, Labour’s management of the economy has reduced our competitiveness, reduced our productivity growth and reduced our overall growth potential. The Conservative leadership should be banging home this message till we are all bored with it.
- Howard Flight is the former Shadow Chief Secretary to the Treasury and former deputy chairman of the Conservatives
