150409 Labour overspending
  • New Labour in summary. No single graph could tell the entire story of the New Labour years, but the one above is probably the closest there is. It has the years of fiscal restraint, when Labour followed Conservative plans and only increased spending by between one and four per cent a year. Then it has the years when Gordon Brown went wild, pushing spending beyond the Government’s income by many tens of billions of pounds. And then there’s the crash, when tax revenues plummeted and spending continued up, up and up.
  • The argument for all that spending… How would Brown defend himself against allegations of rampant spendthriftery?He’d probably say that the middle periodwas Labour “investing” in public services that had been “underfunded” by the Tories; whilst the crash was simply the crash, and was always going to result in lower tax revenues and higher spending on social security. There’s a degree of truth in both of these claims. Labour increased spending on, say, transport by about 4.1 per cent a year, against the Conservatives’ 0.4 per cent. And then, as soon as the economy blew up, social security spending rose faster, by about 5.3 per cent a year.
  • …and the argument against. But, as Brown always failed to admit, not all spending is useful spending. As the Institute for Fiscal Studies once put it, “if [Labour] had managed to maintain the ‘bang for each buck’ at the level it inherited in 1997, it would have been able to deliver the quantity and quality of public services it delivered in 2007 for £42.5 billion less.” Instead, thanks to spending so much beyond taxation, Labour actually delivered a deficit of almost £42.5 billion in 2007. In the years up to that point, they had already borrowed about £80 billion more than they originally expected. They were spending on credit as though there really was no more boom and bust. But the bust came nonetheless.
  • What Miliband thinks. Ed Miliband spoke about Labour’s spending during an interview with Andrew Marr in January 2011. “Well, if you look at actually what happened,” averred the Labour leader, “we slowed the growth of public spending in about 2005 or 2006 precisely because the tax receipts weren’t coming in sufficiently.” It’s a remarkable claim, in a way, because it seems to suggest that Labour had been overspending. But it’s also an inadequate defence of the policy. Slowing the growth of public spending to 3.5 per cent in 2005-06 (and then 2.1 per cent in 2006-07) wasn’t nearly enough to protect the public finances from the horrors to come. We still entered the crash with a debt pile that topped half-a-trillion.
  • The fear. One of the most important fiscal lessons of the past decade is that deficits are unwieldy things. Once they’ve been built up, it takes more than just a couple of years of “slowed public spending growth” to knock them down, and they can rise again with events that are beyond Westminster’s control. This is why I’d prefer politicians to keep a steely focus on the departmental spending that is within their influence. Question is: would a Labour government’s focus ever be steely enough?

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