Monday, 27 January 2014

Labour's economic credibility problem

Labour are once again promising to take tough decisions to bring down Britain's deficit: whether they can be trusted to avoid a return to the excess public spending of their boom years will be the main theme of the next election. Can you trust Labour's promise to reduce the deficit? 

As it happens, this is not the first time Labour has promised to reduce the deficit, they often made the same promise while in government, so we can judge their trustworthiness by checking how they got on last time.

Year after year, Gordon Brown used to stand up and give a budget speech in which he promised that the deficit would be cut. Every year he failed. His speeches are all still available on line* so I've compiled his predictions into this pretty rainbow graph:

Click to enlarge

Each line represents a budget speech and shows the deficit forecast made in that year. For example, the yellow line shows the forecast from the 2004 budget in which Labour promised that the deficit would fall from £38 billion to £23 billion. The light blue line shows the 2006 prediction of a deficit falling from £37 billion to £23 billion.

Every line slopes down, because Labour were always promising a smaller spending deficit tomorrow. But the lines keep starting in the mid-£30s, because borrowing never actually fell from that level. The lines all finish in the low £20s not at zero, underlining that  even during the boom years there was no plan to stop borrowing, only to borrow a bit less.

This graph captures the story of Labour economic policy: "We will always borrow, but we promise to borrow less tomorrow." Tomorrow never comes. 

Worse, these years were before the recession. They were the last few years of the longest period of continuous economic growth Britain has ever seen. These were the economic good times, with high and growing tax revenues making government spending choices an easy business of choosing how much extra to shovel into each department. Reducing the deficit would not have meant difficult choices, it would just have meant shovelling the money out a little more slowly. But that was too hard for Labour, even with a Chancellor whose reputation for sound management earned him the nicknames Prudence and The Iron Chancellor. At the time, they were not meant to be ironic.

So here we are in 2014. Labour are back with a new set of deficit promises, telling us once again that they will make difficult choices...tomorrow. The graph documents 5 separate broken promises to reduce the deficit during easy times. You'd be a fool to think that Labour will finally keep this promise, at the 6th attempt, when cash is tighter and the choices involved are dramatically more difficult, especially when they've attacked the government in lurid terms for every hard decision it's tried to make.

This graph also calls out the blatant attempt to rewrite history, as Labour now argue that borrowing was in fact quite reasonable during that period. But look at all those sloping lines, each one saying the same thing: "borrowing £35 billion per year is too much, but we promise to bring it down, so don't panic." What we are told now is that those levels of spending were not out-of-control and excessive; that they were both deliberate and sensible.

My question to people claiming that is: if Gordon Brown thought that borrowing about £35 billion each year was a sustainable, reasonable level of deficit spending, why didn't he make that case at the time? Why did he keep promising that he would bring it down? Only afterwards did people start to say "Ah yes, we meant to do that."

Update 27/1/14: Following reader feedback, I added "actuals" to the graph, so you can compare the forecasts against the actual borrowing figure in each year. I only plotted actuals to 2007, because from 2008 onwards they go stratospheric as the recession and bank bailouts kick in. 

* For example, here is the full text of his 2004 budget speech.
Relevant section in full:
"I turn to net borrowing. Compared with 8 per cent ten years ago, and an average of 6 per cent over the early nineties, net borrowing this year and future years to 2008-9 is, as a percentage of GDP, 3.4, 2.8, 2.5, 2.1, 1.9 and 1.6 per cent of GDP, with, for this and future years, the cash figures £37.5 billions, £33 billions, and then £31, £27, £27 and £23 billions."

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