As the cuts debate rages, the ippr's senior economist Tony Dolphin looks at whether the latest critique of Ed Miliband's economic policy is justified.
As the cuts debate rages, and strategies for campaigning against them are discussed at today’s Netroots conference, Tony Dolphin looks at whether the latest critique of Ed Miliband’s economic policy is justified
Phil Collins took Ed Miliband to task in yesterday’s Times (£) for not confessing to the hubris that he says afflicted the Labour government ahead of the financial collapse and recession. His charge is that Labour was too optimistic about economic growth at the time and, thus, too optimistic about government revenues. As a result, government spending was too high and the deficit problem that the country now faces is, in part, due to this misjudgement.
There is an element of truth in this analysis – though it must be said that Labour’s hubris was shared by most leading economists and by David Cameron and George Osborne, who promised to match Labour’s spending plans.
In 2007, the UK economy had experienced 15 years of uninterrupted growth, unemployment had fallen by 1½ million from its peak in 1993, inflation was close to its target rate and interest rates were at historically low levels. Things do not get much better than this and if ever a government should have been running a surplus on its current budget, the UK government should have been in 2007.
But, according to the figures in the June Budget documents, the cyclically-adjusted deficit on the current budget – the measure that George Osborne targets to be zero by 2015-16 – was just 0.6 per cent of GDP in 2007-8. If Labour were guilty of fiscal profligacy, it was hardly on a grand scale. There is little doubt that the vast bulk of the deficit problem is the result of the financial collapse and recession.
Ed Miliband is right, therefore, to counter Tory talk of ‘Labour’s deficit’. How much blame he should accept on behalf of Labour when doing so (he did say in his conference speech that Labour was wrong to think that there would be no more boom and bust) is largely a political judgement – and one on which he and Phil Collins clearly disagree.
What matters more, though, is whether the diagnosis of the problem affects the remedies put forward to cure it. The Conservative (and post-election Liberal Democrat) view is that the deficit is too high because public spending is too large relative to revenues.
Their solution, therefore, is a drastic deficit reduction programme tilted heavily (77:23) in favour of spending cuts. Deficit reduction under Labour, if their last budget plans are any guide, would also be achieved largely by spending cuts (accounting for over 70 per cent of the total), though these would be spread out over a longer period.
Both parties, therefore, appear to accept to a large degree that the problem is excessive public spending. But why not increase revenues more?
The Tories, supported by their Lib Dem allies, want to reduce significantly the share of government spending in GDP, Labour’s plans would produce a similar outcome; who, then, will make the positive case for taxation to fund excellence in the state provision of health, education, defence and other services?
Of course, the best – and least painful – way of boosting government revenues, and thus ensuring support for public spending, is to increase the growth of national income. Once it is accepted that the deficit has arisen largely as a result of the recession, it should be clear that more effort needs to be put into public policies that promote economic growth.
George Osborne has spoken about the need to rebalance the economy and generate more growth through investment spending and exports, but he seems largely bereft of ideas to bring about this about.
The failure of the government to come up with enough measures to fill a white paper on growth suggests a new form of hubris has overtaken the Treasury: a belief that deficit reduction, and admittedly some cuts in corporate tax rates, are all that is required to place the economy on a path of strong and sustainable growth. Sadly, this is unlikely to be the case.
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