The Sun claims 'no sane person' can believe spending didn't cause the crash. These economists disagree.
The papers are ablaze this morning with write-ups of last night’s BBC Question Time, where Labour leader Ed Miliband defended his party’s record on economics.
While the liberal Guardian and Independent papers lead with Miliband’s declaration he would sooner not be prime minister than forge a deal with the Scottish National Party, the Tory press has seized on his questions about public spending.
When asked by audience members if he agrees Labour spent to much money while in office, Miliband said he did not, repeating his argument that the financial crisis caused the rise in spending, not the other way around.
The audience, which the Tory press warned would be too left-wing before the broadcast, cut with the grain sown by the very same papers that praise them today, accusing Miliband of peddling a lie.
Always at the head of the pack, today’s Sun editorial says:
“To gasps and groans, the Labour leader insisted the Gordon Brown government in which he served played no part in the financial disaster which left the coalition with ‘no money’ in 2010.
It was all down to the grasping bankers and the global crash, he claimed. Not Labour’s overspending.
There cannot be a sane person who believes that.”
As it happens, Miliband does not clear Labour of responsibility. He has said repeatedly its failure to adequately regulate the banks led to the crisis.
But is it true that ‘no sane person’ can believe it was Labour’s spending that caused the crash?
William Keegan, economics commentator at the Observer, begs to differ in his 2014 book Mr Osborne’s Economic Experiment:
“On the eve of the 2007-2008 financial crisis, public spending as a share of the economy was, at 39 per cent of GDP, close to the levels recorded during the latter years of Kenneth Clarke’s 1993-1997 chancellorship.”
Or what about Nobel prize-winning economist Paul Krugman? Writing in March in the New York Times, he said:
“Was the Labour government that ruled Britain before the crisis profligate? Nobody thought so at the time.
In 2007, government debt as a percentage of G.D.P. was close to its lowest level in a century (and well below the level in the United States), while the budget deficit was quite small.
This graph puts spending under the last Labour government into historical perspective (click to enlarge):
In fact, the pre-crisis deficit was lower under Labour than during the previous Tory government of John Major, as this graph shows:
Oxford macroeconomics professor Simon Wren-Lewis, writing in the Independent, explains:
“We can see the surpluses in the early years of the Labour government, followed by the deficits around 2002/3. In the final years before the recession, we can see how policy tightened, so that just before the onset of the recession the deficit was very small.
This is hardly the story of a profligate government creating a crisis. Compare the tiny budget deficit in 2006/7 with the much larger deficits under the Conservative government in 1992-4.”
Of course, government debt as a percentage of GDP did rise under Labour, but after the financial crisis hit and tax receipts collapsed. As this graph shows, the spike in borrowing corresponds precisely with the sharp drop in GDP growth during the crash:
It’s a breakdown in the logic of cause and effect – as well as basic chronology – to say the rise in borrowing and spending after the crash was what caused it.
Writing in his excellent article ‘The Austerity Delusion‘ in Wednesday’s Guardian, (which includes a bruising critique of the current Labour party), Krugman called the idea that Labour’s fiscal irresponsibility caused the financial crisis ‘nonsensical’.
Wren-Lewis said blaming Labour’s spending and borrowing for the crisis is ‘economically illiterate’:
“the last government did not borrow excessively, whilst the recession was a consequence of overleveraged banks and the collapse of the US housing market.
The banks overextended themselves in poorly regulated financial markets, indulging in high-risk lending in the belief that a housing bubble would never burst.”
We’ve seen the Sun try to paint its political enemies as ‘insane’ before, writing on April 14 that anyone who thinks Miliband will run the economy more sensibly than Cameron shoold seek a psychiatrist.
Meanwhile, the current government’s record on the economy is a complete shambles, baring no relation to the rosy picture in the press, and has even seen (gasp) massive borrowing.
Sanity or insanity aside, no sensible person can take the Tory press seriously on economics as long as it continues to promote falsehoods on Labour spending and the financial crash.
Adam Barnett is a staff writer at Left Foot Forward. Follow MediaWatch on Twitter
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39 Responses to “Tory press blasts Miliband on Labour spending and the crash. But he’s right”
Leon Wolfeson
Yes, those poor…let’s see…what happened in 1945-1950.
Oh right, disproved.
Leon Wolfeson
Oh it could, in some situations. I can definitely see ways to do it.
Was the UK near them? Absolutely not. Moreover, a depression is exactly when some kinds of spending such as high-return welfare *should* rise sharply.
Simon Glass
The poor suffer more under labour? What are you on?
Child poverty reduced dramatically between 1998/9-2011/12 when 1.1 million children were lifted out of poverty. Conversely Thatcher increased child poverty dramatically: http://www.ifs.org.uk/tools_and_resources/incomes_in_uk
And now? The number of those on less than the so-called minimum income threshold in 2012/13 was up by more than a third from 5.9 million in 2008/09,
And as to labour’s so called economic profligacy:
George Osborne’s own estimates, the national debt will have grown by 26.9% of GDP between 2010 and 2015. If you want to check this for yourself, have a look at page 19 of the November 2010 OBR Economic and Fiscal Outlook which records the debt to GDP ratio as 53.5% of GDP for 2009-10, and page 20 of the December 2014 OBR Economic and Fiscal Outlook which records the debt to GDP ratio for 2014-15 as being 80.4%.
In the last 200 years of economic history there have only been three prolonged periods of debt accumulation worse than George Osborne’s tenure as Chancellor of the Exchequer: The First World War (+110% of GDP), the Second World War (+100% of GDP) and the tenure of Tory Chancellor Nicholas Vansittart 1812-1823 (+64% of GDP).
Having increased public sector debt by 26.9% in five years, George Osborne has undeniably created more new debt than any single Labour government in history ever has. In fact it’s a bigger proportional increase in the national debt than all of the Labour governments in history combined.
On the two occasions that Labour oversaw increases in the national debt as a percentage of GDP there were the mitigating circumstances of huge global financial crises. The Ramsay MacDonald government of 1929-31 coincided with global fallout from the Wall Street Crash (they left a 12% increase in the debt to GDP ratio), and the last few years of the Blair-Brown government of 1997-2010 coincided with the 2008 financial sector insolvency crisis (they left an 11% increase).
The other Labour governments all reduced the scale of the national debt, Clement Attlee’s government of 1945-51 reduced the national debt by 40% of GDP despite having to rebuild the UK economy from the ruins of the Second World War; Harold Wilson’s 1964-70 government reduced the national debt by 27% of GDP; and even the Wilson-Callaghan government of 1974-79 managed to reduce the debt by 4% of GDP.
The majority of Labour governments have ended up reducing the national debt, and the two that didn’t happened to coincide with the biggest global financial crisis of the 20th Century and the biggest global financial crisis so far in the 21st Century.
George Osborne is such a poor Chancellor that he makes Gordon Brown’s tenure look highly competent in comparison!
Gordon Mackay
Unemployment rose significantly between 1945 and 1950.
Gordon Mackay
I thought the Willson-Callaghan government had strict spending controls imposed upon them by the IMF in return for a massive bailout.
Osbourne has cut the structural deficit that was left by the previous government. Some say he had cut too fast, others not fast enough. The point is the debt continues to rise until we run a surplus. The last Labour government did not run surpluses after 14 years of straight growth, the questions remains to be answered, under what circumstances would they?