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
He’s made some reductions, but could have done far more without austerity. We could be well back in surplus by now, otherwise.
robertcp
That is not what happened in 2008.
Leon Wolfeson
Oh right, so you claim that your moral superiors caused “for years” non-existent recessions. As you deny all benefit from either public spending or the velocity of money, and absolutely deny fiat currency.
“Believe my propaganda”, you say.
Gordon Mackay
The argument being that there would have been more growth without austerity? I think some reduction in public spending was inevitable after 2010. Labour apparently knew that in 2006 but Brown refuted it with the infamous “we abolished boom and bust” thing. We’ve had more growth than most other countries and growth rates like those before the crash are not likely to happen again. Those growth rates turned out to be unsustainable anyway.
I would argue we have austerity because we were spending too much and wasting too much. The Independent reckoned £25bn wasted on failed IT projects. I’m not defending UC, HS2 or the NHS reorganisation by the way, there have been plenty mistakes in the last five years but there have also been a lot more jobs created.
Labour spending did not cause the crash, that much is true. That they were spending too much before the recession is also true in my opinion.
Simon Glass
You need a bit of critical awareness to think that just because the IFS uses the term ‘structural deficit’ it is anything other than pseudo scientific – but then that’s economics for you, definitely not a science. And the reference to the OECD when the G7 doesn’t provide fertile ground for the preconceived neoliberal view they wish to promulgate makes this the same spin. Labour borrowed to invest in health and education, and actually the deficit/GDP ratio was improving, year on year up to 2007 (from a position of 4 years of absolute surplus 1999- 2003, a record which recent Tory (including thatcher) governments haven’t even come close to matching) In addition, at no point between 2003 and 2007 was the deficit as high (in absolute terms) as it was under Major in 1996 after several quarters of growth.