UK Economy and Public Finance under New Labour
As the global economic situation get worse, the government is considering relaxing the very fiscal rules its introduced. Representative of the whole span of New Labour leadership, it seems the government will further increase the national debt to avoid the tough decisions on expenditure and tax levels that the current economic climate demands.
Yet for some reason, many people seem to hold the belief that Gordon Brown and New Labour have been good for the British economy, and that any economic problems Britain faces today are entirely due to external factors. However, while blaming global factors for the current economic poblems, many New Labour supporters claim that the previous years of economic growth were mainly down to New Labour, including the often repeated "longest sustained economic growth ever" boast.
It’s probably this belief in economic competence that won New Labour their last election. While they have not been as damaging as previous Labour governments, they are most certainly living up to the historic standard of Labour – building upon Conservative initiated change, and leaving an economic mess for the next Conservative government to deal with.
Gordon Brown and New Labour are not the ‘safe pair of hands’ or prudent stewards of our economy as some would believe, and this forcoming U turn on fiscal rules is hardly a break from the past…
The “longest period of sustained economic growth in our history”
…or so the boast proclaims
Even if we accept this as fact (which itself is dubious - see further below), there is something New Labour are neglecting to mention – namely that it was the Conservatives who were by and large responsible for kick starting such growth;
“In a reference to Arsenal's now-broken run of 49 matches without a loss, Mr Brown said the UK had gone one better with 50 successive quarters of growth, cunningly pulling a magician's cloak over the fact that 15 of those quarters were achieved under the Tories.”
“…the UK has enjoyed unbroken economic growth since 1992, without falling into negative growth in any quarter”
The fact that Britain’s economy has grown under Labour should be no surprise - global economic growth, cheap credit, cheap goods and emerging markets from China and Co; combined with the previous domestic actions of the Conservatives such as decreased power of unions, post-ERM boom, and responsible fiscal policies. Yet even the the accuracy of the claim should be doubted, the BBC link above continues:
“The difficulty in assessing the validity of the Chancellor's claim is that there are no quarterly economic growth figures before 1955, so we cannot measure brief recessions before that period.
There are, however, annual figures produced by the international think-tank, the OECD, that go back to 1820, although earlier data are estimates by historians.
These show that during the 20-year post-war economic boom, between 1953 and 1973, Britain grew continually on an annual basis - but that growth was interrupted by several short, quarterly slowdowns.
But, as leading economic historian Nick Crafts points out, if you want to know whether people are actually better off, it is significant that the average annual economic growth rate per person in the 1950s and l960s was substantially higher than it is today.”
(...the party that was in power for the “substantially higher” economic growth of the 50s and 60s?...Conservatives from 1951 to 1964)
As for how this growth serves us today, the OECD predicts that the UK will be the only major economy to go through a recession this financial year ('What is the economic outlook for the OECD countries? An interim assessment'. News Coverage); and this isn't because our economic growth has been exceptional either: From 1997 the economy of the UK has grown the slowest of all English speaking countries (OECD.stat)
Debt
What little growth Gordon Brown can claim responsibility for has been fuelled by easy credit; leading to unbalanced and unsustainable growth; and now the façade is beginning to crack with the ‘credit crunch’, falling house prices, inflation, etc.
“When the Chancellor inherited the economy from the Conservatives he was a very lucky Chancellor indeed and his fiscal policy was, initially, very sound,” says Ruth Lea, director of the Centre for Policy Studies. But that was then and this is now. Old Labour allegiances have crept to the fore and, concludes Lea, “under his stewardship economic and productivity growth have slowed, the balance of payments figures have worsened, private-sector employment growth has fallen, the fiscal situation has deteriorated and international competitiveness has fallen”
Household sector debt has now reached the £1 trillion mark, the highest level in our history, and the highest-per-household of any G7 country – ever.
Public finances are in similar shape. Public debt stands at 43.8% of GDP - £618.8 billion. New Labour would like to argue that debt as % of GDP has decreased since 1997, and it has – by 1.3% (Note: This is not longer accurate with the nationalisation of Northern Rock, read below). But this statistical use masks the extent of Britain's debt increase under New Labour.
When Labour came in to power (Table S2.5) total debt stood at £350 billion it has since increased by 76.8% to £618.8 billion. In a time of global economic prosperity and domestic GDP growth reducing national debt should have been a no-brainier; “saving for a rainy day” so to speak. Now we have a government that is in over its head; and when an economic downturn has arrived finds itself with no room to manoeuvre. (Other than to backtrack on its own fiscal rules of course.)
Simply paying the interest on this debt costs the tax payer £31 billion a year(Charts 1.1 & 1.2):
Thats more than we spend on “Industry, Agriculture, Employment and Training” and only two billion less than we do on defence.
For the last two years that New Labour clings to power, it looks things will get worse – they are hardly going to raise taxes and/ or curtail expenditure in their current situation; highlighted by recent reconsiderations of their own fiscal policies. How much worse is hard to estimate, but the last budget (see above linked charts) detailed the government spending £43 billion more than it received in taxes. So we could realistically expect to see at least another £86 billion added to the public debt by the next general election.
However, this look at debt does not consider all public liabilities. Then the figure becomes really worrying.
The latest Public Finances Report, by the Office of National Statistics, (more recent and reliable than the last budget report) has this graph:
The fact that it is measured as % of GDP is very important. Previously, Labour had been able to hide its huge increase in national debt (see opening post) behind GDP growth - expressed as a %, this increase appeared nominal; though in real terms it was not so. Now that the S has well and truly HTF, this statistical mirage no longer the works - their borrowing has caught up with them and despite overseeing a long period of economic prosperity; New Labour has failed to lower the national debt as a % of GDP, and has significantly increased it in real terms.
Employment
Despite the supporters of New Labour so keenly telling us how bad Britain had it under the Conservatives, with 3 million unemployed being the usual example; it seems they have chosen to gloss over the fact that there are over nine million unemployed or "unoccupied" people of working age withing the United Kingdom (Office of National Statistics), only 1.71 million of which can be explained away by those in education.
Below shows by how much each respective country managed to reduce (shown as %) their standardised unemployment rate between 1997 and 2007. The United Kingdom reduced their unemployment rate by less than all English speaking countries with the exception of the USA. (OECD.stat)
Country: Reduction in Unemployment rate (%)
Ireland: 52.5%
Australia: 46.9%
New Zealand: 45.4%
Canada: 34%
United Kingdom: 22%
United States: 6%
In the same period, the UK has also gone from the second lowest unemployment rate of the group, to the second highest.
Taxation
In 1996-7 the then Conservative government took £285.4 billion in taxation. (table S2.4)
The last budget detailed the now New Labour government taking £575 billion (Chart 1.2)
An increase of £289.6 billion, or an increase of just over 101%. Of course this doubling of the tax burden would not look so great of a jump measured as % of GDP, especially once adjusted for inflation. However, if the tax burden had remained the same in real terms (as in adjusted for the level of inflation) since 1996, the average household would be paying £5,140 less in taxation. Even if it had stayed the same as % of GDP, each household would be paying £1,600 less.
To top this all off, it is the poorest fifth of households that have the highest tax burden in relation to income; and that the tax burden gap between the poorest fifth and richest fifth has actually increased under New Labour. Admittedly the worsening in inequality has been very small, but this is the self styled ‘party for the people, with boasts that Britain is a ‘fairer place’.
Most would expect increased expenditure under a New Labour government; but what may suprise some, however, is the extent to which this has outstripped that of other governments. New Labour had the benefit to inherit a tax system that drained less of the nations wealth than the OECD average, but as soon as they had won their second term (and so once thier pledge to keep expenditure as low as the Conservatives had 'expired' two years earlier); the amount of GDP being taken by the government rapidly rose above the OECD average:
(OECD Outlook 81, Annex, Table 25. Google Books scan)
Its not just the average citizen that has picked up the bill for this bloated government - our businesses have been hit with an uncompetetive corporation tax bill. In 1996, Britain had the 5th lowest corporation tax in the OECD, we now have the 19th lowest. Even with the recent reduction to 28%, Britain still has a Corporation tax rate higher than the OECD and EU average. (KPMG Corporate Tax Survey 2007, news coverage)
The supply side economics ('voodoo economics', to the nay-sayers) that had benfited Britain in the past under the Conservatives have been ignored under Brown. If there is one thing that proves the benfits of lower taxes to public finances, it is the case of Ireland. With a Corporation Tax of 12.5%, a sensible guess might be that that they get a lot less income per capita via this tax, than the UK with our hefty 28% tax. Sensible, but wrong.
(OECD.stat, (Revenue Statistics))
Expenditure
This large increase in taxation might have been justifiable if it saw a proportionally beneficial improvement in our public services – however, these are most certainly not twice as good as they were.
For example, let’s take the NHS. In 1996 the NHS (stats on England alone) received just under £33 billion a year.
As you can see by 2004 in was receiving over £56 billion, and this year it will be £90 billion (next link for source). Under current government projections funding for the entire NHS would have risen to £110 billion by 2010. In real terms this amounts to an increase of £35 billion; almost a doubling of funds available for the NHS.
The NHS most isn’t twice as good as in 1997, even under any government provided statistical measurement. Being eight at the time, I’m hardly in the position to make any claims on personal experience, however it appears most would agree – the BBC has reported that 4 out of 10 think there has been no improvement, and only 1 in 3 there has been any improvement at all. Personally I think there has been a small improvement, but when put alongside how much money has been spent, it becomes clear that New Labour has wasted a great opportunity. The picture is similar elswhere in the public sector: the UK's ranking in the OECDs Program for International Student Asessment (PISA) has slumped under New Labour; recorded crime has increased; and since its privatisation was completed under New Labour, the rail network recieves more funding than (nationalised) British Rail did.
This is representative of New Labour’s ‘solution’ to most problems (throw money at it), and the results have been underwhelming; the tax burden unjustifiable (now 42.6% of our GDP), and in the process wasted billions of taxpayers money. With the recent record levels of borrowing by Labour and the addition of Northern Rock debts, our national debt is above the 40% ceiling than Gordon Brown had set out in his seong fiscal rule.
Efficiency
To add insult to injury, if our public expenditure was as efficient as USA or Japan we could decrease government expenditure by 16%, without a drop in the quality of the public services that are currently provided.
As the link states, that would be a saving to the taxpayer of £70 billion!
…in 2003. Since the report was written government expenditure has increased significantly. As you can see by the budget pie chart above, expenditure this year will amount to £618 billion – 16% of that being £98 billion. Or, if you like, a reduction of the tax burden on each household by £3,967.
Drawbacks of a High Tax Economy
Even if New Labour had spent our money wisely, we would still be left with the negative effects of not only a high tax burden, but also an over complicated one, upon our economy. A simple measure of the increasing complication of our tax code comes from is Tolley's Yellow Tax Handbook:
“…the accountants' "bible", comprised a mere 4,555 pages when Mr Brown walked into the Treasury. This year's edition weighs in at 9,806 pages”
Our high and complicated tax regime has knocked us out of the Index of Economic Freedom’s “Free” economy classification, down to “mostly free”.
A Centre for Policy Studies report (bottom page of link) on the impact of ‘big government’, using data from the World Bank, OECD and IMF show that ‘slim governments’ (government revenue and expenditure below 40% of GDP) out perform ‘big governments’ (over 40% of GDP) on nearly all indicators; for instance:
• Slim governments GDP grew at an average of 5.4% a year since 1998, compared to 2.1% for bigger governments
• Slim governments ran an average budget surplus of 0.3% of GSP, compared to -1.1% for big governments
• Slim governments spend more of GDP on public services (non-social benefit transfers) than big governments
• Slim governments spend less on education as % of GDP yet match university enrolment rates of big governments
(N.B all Nations used in study are classified as advanced by the OECD or are in the EU)
A similar report form the Institute of Economic Affairs makes similar points on the drawbacks of high taxation, for instance:
That Gold Sale
In 1999 Gordon Brown took the decision to sell half of Britain's Gold reserves.
At the lowest price gold had been in the previous twenty years.
The resulting dip in market prices of gold has become known as the Brown Bottom. The Times article on the sale would be laughable if it were not so scary that this is the man who has been running Britain's finances:
The cost of this? £3 billion
And the list goes on…
A report from the Tax Payers Alliance highlights further failures of the New Labour government. Below are a few of the points that stand out. Underneath each point are the sources used to gather the appropriate data by the TPA:
I’ll end with another excerpt form the Institute of Economic Affairs publication, something that should trouble anyone wishing for a smaller government in Britain…
- Government borrowing has exceeded £30 billion every year since 2002
- Overall employment rate below 1990. Economic activity rate under New Labour has yet to beat that of Thatcher's government in 1990
- 1.2 million Manufacturing jobs have been lost since 1997
- ONS Labour Market Statistics
- Additional verification (N.B article 4 years old, hence 1 million figure rather than 1.2)
- Britain's inflation rate has averaged 2.4% since 1997, compared with 1.6% for all developed economies
- Share of world exports fallen from 5.5% in 1997 to 4.6% in 2005
- OECD Economic Outlook 77
- Council tax is more than twice the 1996 level
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Originally Posted by Freddie
all voters should worry about where all the wealth of this country has gone too,, new labour and the tories have sold everything off,, power,, water ,,telecoms,, everything, OUR COUNTRY IS IN THE HANDS OF FOREIGN BUSINESS,,
