The overspending question

Money, economy, fiscal responsibility, budget, spending, pensions, saving

Equity and efficiency are two sides of the same coin

Public spending has become one of the thorniest issues with which the Labour leadership contenders have had to grapple. Much of the debate so far has turned on a single question: Was the last Labour government spending too much money in the run-up to the financial crisis in 2007-8? In answering this, there are several points we must be clear on from the start.

First, it was not public spending that caused the financial crisis. As permanent secretary at the Treasury Nicholas Macpherson wrote recently, ‘The 2008 crisis was a banking crisis pure and simple.’

Second, we are not misremembering when we think back to the crumbling schools and hospitals before 1997. Labour entered office at a time of historically low levels of spending and investment and it was right to correct that.

Third, Britain entered the financial crisis on a relatively sound fiscal footing. The overall stock of government debt had fallen from around 43 per cent of GDP in 1997 to around 37 per cent on the eve of the crisis, as the economy was growing faster than new borrowing was being accumulated.

The above points are all true and we should not let the Tories get away with claiming otherwise.

But there is a debate about the size of the deficit – the difference between the government’s income and expenditure – that it is appropriate to run when the economy is growing strongly.

Here, it makes sense to turn to the man whose ideas have most influenced the debate on deficit spending: John Maynard Keynes.

Keynes was the giant of 20th century economics and his insights into the 1930s depression had a profound impact on policymakers. He argued that, in times of unemployment, if the private sector is unable or unwilling to invest, it is both economically sensible and morally right for the state to step in – and this could involve running a deficit.

But Keynes himself assumed that, in ordinary circumstances, there would be a surplus on the current budget. Keynesians worried that overall deficits could be problematic if they occurred at times of full employment, when they could ‘crowd out’ private investment and lead to higher interest rates.

So there is nothing intrinsically or politically ‘rightwing’ about having a budget surplus – and nothing progressive about running a deficit if it makes it harder for businesses to create jobs, or if it piles up higher debt levels for future generations.

How, then, can policymakers know when it is right to let the deficit rise and when it must be cut? This is a question that Labour sought to address in government in the internal discussions after 2005 about a ‘fundamental savings review’. Having grown spending to make up for the years of Tory underinvestment, could Labour recalibrate its funding for public services, to continue giving them the support they needed while maintaining fiscal sustainability – and fending off ‘big state’ and ‘tax-and-spend’ arguments to which the Conservative leadership would inevitably return?

In the end, Labour did not proceed with the review as originally envisaged. Nobody foresaw the financial crisis that was round the corner – least of all George Osborne who backed Labour’s spending plans until 2008.

But the principle behind it is a fair one as Labour seeks to regain its fiscal credibility. Believing in both equitable and efficient public services should be two sides of the same coin, and demonstrably showing that Labour is seeking to avoid waste will shore it up when acting against future downturns.

When the economy is growing and tax receipts are rising, Labour should focus more on identifying new savings than new spending. Those seeking to regain our economic credibility should consider these arguments when seeking to set the party on a sure footing for victory in 2020.

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Stuart Hudson is a former special adviser

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Photo: William Warby

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Comments: 10...

  1. On June 16, 2015 at 8:47 pm StevenBoxall responded with... #

    Keynes may have said that a Government shouldn’t run a deficit at times of full-employment but it should be remembered that although the last Labour Government did reduce unemployment it didn’t get to full-employment. Also, the time of the last Labour Government was hardly normal as they had to make up for about 30 years of underinvestment in the UK’s infrastructure.

    Finally, before the banking crisis and crash the message had already gone out that the next CSR would be on the basis that public expenditure would be cut back. So, Labour was beginning to prepare for the next downturn, but had not accounted for a banking and finance sector being run by crooks.

    • On June 17, 2015 at 9:20 am Justice4Rinka responded with... #

      “a banking and finance sector being run by crooks.”

      Fancy not accounting for that, eh? I mean, it’s not as if Labour dismantled an effective regulatory system and replaced it with a completely ineffective one in the face of Tory warnings not to do so, or anything, is it? Perish the thought!

      And clearly Labour’s system was fit for purpose because look at at the regulators who got sacked for screwing up. Go on, name one.

      Labour = delusional, incompetent, evil

      • On June 17, 2015 at 6:13 pm StevenBoxall responded with... #

        Labour may have changed the role of The Bank of England, and an argument coul dbe made that this was a mistake – as could the argument that the Bank of England didn’t do the job ithad been given. However, regulation of the banking and finance sector goes wider than the Bank of England, and the Conservatives right up until the crash pushed for this regulation to be further relaxed – so most of the Tory warnings were to push for further relaxation of the regulations.

        The regulators may have been poor regulators; they ma y have been blind, but it was not them who were crooked, and it is very wrong that those who knowingly ripped off their customers and shareolders have not been in front of a court.

        • On June 17, 2015 at 6:44 pm Justice4Rinka responded with... #

          And who wrote the regulations that mean that “those who knowingly ripped off their customers and shareolders have not been in front of a court”?

          Er, that would be Labour.

          Not one regulator was fired because none failed to do their job. Their job was the wrong job.

          The Tories were correct to oppose further regulation because Labour’s regulation was wholly ineffective. Not one bank failure was averted by it. What was needed was proper regulation, but Labour disagreed and dismantled it in 1997.

          If all houses were made of wood and tar and all were heated by open fires, Labour would endlessly regulate what bin your rubbish had to go into while scrapping all that Tory fire safety regulation.

          Labour = unfit to govern

          • On June 18, 2015 at 5:33 pm StevenBoxall responded with... #

            What are the precise names of the Regulations to which you refer, and what are the clause numbers within these regulations which specifically prohibits any criminal or civil legal action being taken against anyone who acts frauduently or negligently?

            I happen to agree with you that the nature of the regulation was wrong, and that it invited gaming of them, but the regulations themselves didn’t force anyone to act against the interests of their customers or even their own shareholders in a negligent or fraudulent way.

  2. On June 16, 2015 at 9:40 pm Gary Haley responded with... #

    Finally someone has spoken the truth about the deficit, Labour’s spending record and our record of stimulating growth in the economy. Shame it’s all five years too late. This should have been shouted from the rooftops years ago by the leadership but was ignored, creating a vacuum for Tories to fill with their misinformation about “the economic crisis left by Labour”. Tories and LibDems voted FOR Labour’s plan to tackle the banking crisis, and spent years in opposition saying we weren’t spending enough.
    The reality is that Osborne and Cameron have cost this country around £30 billion a year in lost revenues, forever, as a result of their counterintuitive choking off of stimulus just when our economy needed it.
    Regaining economic credibility starts by defending our record, not leaving the pitch and an open goal for the Tories.

  3. On June 16, 2015 at 10:52 pm Bob Vant responded with... #

    “Second, we are not misremembering when we think back to the crumbling schools and hospitals before 1997. Labour entered office at a time of historically low levels of spending and investment and it was right to correct that.”

    Indeed…….but the problem is that folk have short memories, and tend to be sceptical about what they hear from politicians.

    So……we need something to remind them irrefutably that things were in a mess, and that
    we picked schools and hospitals up off the floor where the Tories left them.

    Go look up ONE CONSTITUENCY, TWO GOVERNMENTS. It aimed to give the specific details needed to disarm voter cynicism. Sad to say, it was hardly used in 2010………or since…….opinions are sought as to whether or not it backs up SH’s point.

  4. On June 17, 2015 at 9:16 am Justice4Rinka responded with... #

    we are not misremembering when we think back to the crumbling schools and hospitals before 1997

    You’re not misremembering, no – you’re lying.

    Mid-Staffs ring any bells? Old ladies drinking the water from their flower vases and starving to death in their own poo on trolleys in corridors? Doctors having to put food and water on patients as the scumbag nurses would let them die of thirst otherwise? The Labour Party then leaping to the defence of these staff?

    You mentioned schools. Let’s talk about young people. Let’s talk about children in Rotherham, where over 1,400 white children were raped for years by Asian paedophiles, and Labour covered it up because Asian paedophiles are your client group and you’ve bought their votes.

    “crumbling” my arse. Labour brought back filthy Dickensian workhouses and the rape of certain races of children, and you did it all to grub a few votes and keep yourselves in power.

    Labour means the weak, the sick and the old are raped and killed by Labour’s client state.

    Scum, scum, scum.

  5. On June 17, 2015 at 6:18 pm StevenBoxall responded with... #

    There have been some anti-Labour statements made in this thread with what I know to be ‘misinformation’ – any chance of anyone from the Labour Party reponding to these (or even an ex-special advisor), instead of leaving it to members of the public? This is why Labour lost the General Election – they let anyone say anything without fear of any rebuttal.

  6. On August 26, 2015 at 8:37 pm Oliver Healey responded with... #

    In correcting the economic failures of the past there is the primary requirement for future governments to end the secondary banking procedure of Fractional Reserve Lending whereby the money supply is multiplied by 97% by the Private Banking Monopolies.

    Nobel Prize Winning Economist Milton Friedman advocated that such a system should be implemented limiting the haphazard growth of the money supply.

    If the Banks want to lend money to people or to gamble billions on derivatives and such things. Then the money they use should be bought from a state owned central bank. Why collect pittance in bank profit taxes when the UK nation state can sell the bankers the money they use…

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