Who is better at managing the UK economy, Labour or the Tories?

Economic Growth under Labour and under the Tories

Looking at the long term economic growth rate under both Tory and Labour Governments since 1950, there is no significant difference between them – it averages 2.6% p.a. during periods of Tory rule, 2.5% per annum under Labour[1].

 

Both parties performed poorly until the 1980s

Comparing the performance of the UK to France, the USA, and the average of high-income OECD countries, the UK economy performed poorly compared to our competitors under both Tory and Labour Governments until the end of the 1970s[2].

 

The conservatives under Thatcher initially presided over a deep recession that caused mass unemployment and extreme misery, but later years did see the UK outperform our competitors on economic growth. Over the 1979-97 period of Tory Government as a whole, however, the GDP increase of 52% under the conservatives was higher than France’s 44% but lagged a long way behind the 63% average of the OECD countries let alone the 70% increase in the USA.

 

The only post-war Government to achieve faster economic growth than the average of all rich countries is the labour Government of 1997-2010[3]. Under labour the economy grew by nearly 30%, whereas the high income countries as a group achieved growth of about 28%. From 1997-2008, Labour consistently achieved high GDP growth with low inflation. During the period, the cumulative increase in national output per head in the UK was greater in percentage terms than in either the US or France. The major and important difference from the Conservatives is that labour achieved this good performance while also distributing the benefits more equitably, achieving major reductions in poverty, especially child poverty.

 

The period of growth came to an end with the global financial crisis. During the global recession from 2008, the cumulative decline in national GDP in the UK was about 4.7% compared to an OECD average of about 3.5%, and about 3% in the US and France. The UK was hit harder because of the far greater relative importance of banking and finance in the UK economy. The recession was not caused by labour economic mismanagement.

 

What is less well recognised in the UK (though acknowledged in other countries) is that the UK performed a really significant role in brokering the necessary international action to save the world financial system from collapse[4]. It is ironic that labour ended up with a reputation for economic incompetence when most international observers would give the UK much of the credit for preventing the global recession being a whole lot worse.

 

Under the Tory led coalition since 2010, recovery in the UK was slow, and (unlike the US) the UK had still not recovered the pre-slump peak level of output per head by 2014. The IMF and other commentators have argued that unnecessarily severe austerity policies have damaged economic growth since 2010[5].France performed even more poorly during the recovery because of the problems of the Euro zone – the decision to keep us out of the Eurozone was another example of sound Labour economic judgement.

Economic Management

Growth is only one aspect of economic management. Another indicator of the skill in economic management is the control of inflation, with both parties accepting that a target of about 2% per annum is appropriate. Although direct responsibility is given to the Bank of England (a significant reform introduced by Labour), Government can make their task much more difficult if it fails to retain good control of its own spending.

 

Recent economic history suggests that Labour has performed better than the Conservatives.

 

Both Labour and Tory Governments struggled to control inflation in the 1970s in the face of multiple oil shocks abroad and industrial relations problems at home. Despite the severity of the recession that it induced through over-tight monetary policy in the early 1980s, the Thatcher Government still struggled with inflation rates above 5% as late as 1991.

 

Under Labour from 1997, the UK consistently enjoyed a benign combination of moderate inflation and economic growth. Only the global financial crisis brought this to an end. As argued elsewhere, this was not caused by labour, nor was the labour Government especially profligate in its spending decisions. It was appropriate to allow some expansion in the budget deficit to avoid a still deeper recession. The debt never approached unmanageable levels. The debt has been far higher than the current level of about 80% of GDP for much of our history, it is easily financed with current low global interest rates, and will come down in relative terms as economic growth is restored-  even without the planned deep cuts in public spending.

Did Labour ‘Tax and Spend’ Excessively?

Another frequent allegation is that Labour Governments tax and spend excessively. Judge for yourself:-

I. The labour Government of 1997-2010 generally spent less than the 38% of GDP level reached in the final years of the previous Conservative administration. There was a brief (and rapidly reversed) expenditure blip to 38.8% in 2005, but the eve of the global economic crisis saw the Government spending the same share of GDP as their predecessors. Tax revenue was a little higher, which could be argued to reflect a prudent policy of avoiding excessive deficit spending in good times.

2. During the global crisis, which required extra expenditure to avoid a deep recession, expenditure peaked in 2009 at 43.6% of GDP. This is higher than the average of the rich OECD countries, but is lower than France (47%) and comparable to Denmark (43%) Italy (42%) and the Netherlands (42%). Those who have suggested that Labour economic policies would lead to disaster might want to contemplate these figures – and the fact that high spending Denmark and the Netherlands score 3rd and 6th in the global rankings of the World Happiness Report.

Conclusion

The conclusion to draw from this analysis is that there is little difference between the two parties in terms of the quality of economic management. If anything, Labour has performed better since 1997, enjoying greater consistency with less ‘boom and bust.’

 

The big difference between the two parties is in how the fruits of economic growth have been distributed. That will be the subject of a future briefing note.

[1] Calculated by the author from Office of National Statistics GDP data.

[2] Based on World Bank World Development Indicators. Re-unification makes a comparison with Germany difficult.

[3] World Bank, world development indicators, analysis by the author

[4] For quotes and analysis see William Keegan, Saving the World”? Gordon Brown Reconsidered , October 2012, ISBN 978-1-907720-56-7

[5] For IMF quotes see, http://www.theguardian.com/business/2013/may/22/imf-uk-economy-verdict-eurozone-osborne

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The cuts

I am attaching a short piece on the cuts which I did partly to support the Labour Party campaign in Chelmsford – though the views and accuracy are my responsibility alone.

Public Spending Cuts: Not Needed, but Very Damaging

 

Osborne claims that the cuts are necessary for the future health of the economy.

 

This is not true. They are a choice made by an extreme Government intent on reducing the role of the State in providing essential services and a safety net for those who fall on hard times.

 

Some facts:-

No Need for Austerity

 

  1. Public debt at  about 80% of GDP is not high by historical standards (it was over 200% when the NHS was established, and over 100% for much of our history). If nothing more is done to reduce the deficit, the effects of economic growth and inflation mean that it will fall anyway as a share of a growing economy.

 

  1. Because interest rates are so low (and likely to remain so), the 2.5% of GDP annual cost of servicing the debt is trivial. The Thatcher and Major Governments spent more on debt interest in every year they were in power – but nobody then argued that public spending cuts were needed on the scale currently planned.

 

This is why most economists argue that there is no need for further cuts – and they support the case for maintaining spending. At 43% of GDP, public spending is comparable to the average level in the 1970s. It is slightly above the long term average of 40%, but that is to be expected in a period of sluggish growth when Government needs to maintain spending to boost the economy.

Low Tax and Low Spend means Private Affluence for some –Public Squalor for All

 

Osborne claims he is ‘repairing the roof while the sun shines.’ In fact, the sun is not shining on most of us, and this Government is not repairing anything much at all – as the state of our pot-holed roads and the strains on our health and education services will attest. Private affluence for the few is resting on public squalor for us all.

 

Our World Class NHS is Under Threat

We have public services to be proud of – but they are under threat. As recently as 2014, the Commonwealth Fund rated the UK health care system as the best in the world – based on the quality of care, efficiency, and low cost to patients. We achieve this by spending less than other countries -just 8.5% of our national income on health –compared to 11% in major European countries like France and Germany, and a staggering 16% in the US, which is consistently rated as having the worst health care system in the world.

 

These good results though are threatened by rising costs and an ageing population. If we want to keep our good services, we will need to spend a little more – but the extent of the increased spending required will be less if we maintain our efficient Government funded service free at the point of delivery. Outsourcing of services threatens this – bringing in private providers from the inefficient and expensive US system, and undermining the fundamental features of an NHS which is rightly valued in this country.

 

The Cuts in Mid Essex

 

We can see the results of inadequate public funding in our own home town. One important example is the Mid Essex NHS Trust – which runs Broomfield Hospital. The trust has one of the lowest levels of spending per head of population in the country. In 2012-13, it was £24 mn short of the level that Department of Health guidance says is the minimum necessary to provide a uniform level of service. This is over 4% of total expenditure – and the strains have probably increased since.

 

Given the grossly inadequate funding available, it is not surprising that Broomfield has been rated as requiring improvement in the latest Care Quality Commission report, with urgent and emergency services described as ‘inadequate’. Management and staff will get the blame – but the real culprit is a Government trying to maintain a world class health system on the cheap.

 

Conclusion

The very deep cuts now being enacted by this Government threaten fundamental aspects of our way of life as a caring society that wants and can afford a good standard of public services and amenities. Meanwhile this Government continues to fund Cameron’s vanity projects – preposterously expensive nuclear power from Hinckley Point, new high speed rail links based on questionable economic analysis while the roads are full of potholes, and a nuclear weapons system the purpose of which has yet to be explained other than a desire for Cameron to look more important at conferences.

 

We need to fight the cuts – before the deterioration to our fundamental public sector institutions becomes too extensive to be easily repaired by the next Labour Government.