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

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s