The Economic Legacy of Labour – A Summary for the Tories

Thirteen years of Labour has increased the National Debt by £600bn or £10,000 for every person in this country.

How is this worked out?

  1. A prudent government would have kept the National Debt at a constant level of GDP in the boom years. From 2001 to 2007, Labour let this grow by around 15% of GDP.
  2. A prudent government balance the budget over the course of the business cycle. In 2007 Labour were at least 4% short of that. That is, they had a structural deficit.

 

Take the two together. Under current forecasts the structural deficit will still be around in 2014. That is after four years of strong growth, the economy will have grown maybe 15% from the bottom in 2009 and be nearly 10% above the 2007 level. Yet the deficit will still be over 5% of GDP. Seven years at 4% is 28% of national income.

15% + 28% is 43%. Translate this into pounds by multiplying 43% by national income of £1400bn, gives £600bn.

Some could be a little less generous by adding compound interest to the extra £200bn of debt acquired in the good years and 4% structural deficits for seven years the at least £150bn to add to the end of 2014. So that is £750bn.

Under a Prudent Government, this very severe recession would have added up to £300bn to the National Debt. It would have peaked slightly higher than Labour managed in 2007 before the downturn. Most of that could be reduced with a sustained strong recovery and without real cuts in public expenditure.

Instead, the legacy of 13 years of economic mismanagement by a Labour government will be high taxes and a squeeze on public expenditure for a generation.

More detail for my earlier posting at https://manicbeancounter.wordpress.com/2010/03/21/the-impact-of-labour-on-the-current-crisis/.

This is prompted by John Redwood’s posting “Labour Government’s end in Economic Chaos“.

Thanks to Stuart Fairney for the suggestion of passing this idea to the Tory Front Bench.

Balance Sheet Accounting for the UK economy

The true health of the economy is not to be judged by the growth rates, nor the state of the government’s finances on the size of the annual deficit, nor upon the balance of payments. It is upon the state of the balance sheet.

 

In simple terms, a balance sheet consists of liabilities and assets.

 

Liabilities – examples

 

  1. The National Debt £800bn
  2. The Final Salary Pension of public sector employees £1,000bn
  3. State Pension and disability benefits       say £1,000bn
  4. NPV of PFI schemes
  5. Maintenance of exiting assets, e.g. NPV of maintaining buildings and roads in their current state.
  6. Commitments, such as increasing the school leaving age to 18, emissions reductions, or the cost of reducing poverty. 

 

Assets

 

            This is not the actual assets that a government holds – the land and buildings at market rates, the cost of computer equipment. For a business these are assets, as they will provide future returns, but for a government they are the means of carrying services. The major asset is the future tax revenues. The government’s asset is the future capacity of the general public to pay tax.

 

It may not be possible to get a full balance sheet, and any conclusions will be contentious. But from year to year, it will be slightly easier to look at the change in the balance sheet from year to year. Such an approach will be a focus for debate, and move politicians away from short-term expediency and towards long-term stewardship of the Nation’s finances.