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.
Stuart Hudson is a former special adviser
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