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.

Stephanomics shows anti-Tory Bias

Stephanie Flanders, on her BBC blog Stephanomics, can often provide thoughtful comments on the UK economy. Yesterday’s blog, “Cameron’s Nixon Moment” is anything but.

“Nixon famously denied he was a crook. At the weekend David Cameron denied he was a recovery-wrecker, confronting directly the argument that faster deficit reduction would jeopardise growth.”

Whatever the rights and wrongs of the arguments that SF later presents. There is a double meaning.

  1. The superficial one. Nixon’s claim that he was not a crook worked against him. So will Cameron’s denial that he is not a recovery-wrecker.
  2. Guilt by association. Nixon lied about Watergate. He was a crook and only a Presidential pardon allowed him to escape prosecution. The Tories, in trying to cut the deficit will wreck the economic recovery. They are not campaigning to do what is better for the country

There is no distinction made between the political realities (don’t frighten the voters) and the economic realities of doing what is best for the country. This is a tightrope all political parties are walking. With an election looming, the leaning is towards the political side. Any impartial analysis should recognize this. An impartial economic analysis should recognize the real risks that the economy is facing.

The economic reality is this

  1. We have a total deficit of over 12% of GDP. The majority of this is structural. On the Government’s optimistic growth forecast, the deficit will be reduced by a boom, but the structural deficit will be largely untouched. (At the top of the economic cycle, the actual deficit will be less than the structural)
  2. Most of the growth since 2001 has come from two sectors on the output side – the State and the financial services sector. Neither will contribute much to the recovery. In the expenditure side, much of the boom was debt financed – both consumer spending and Government spending.
  3. The flexibility of the UK economy has diminished in the past decade due to increased regulation. The growth will be slow from other sectors.
  4. Due to the high levels of debt, the recovery is at the mercy of interest rates. A modest rise could reverse the recent house price rises, and could add to the cost of servicing the National Debt.
  5. If the deficit is not tackled we could pass a tipping point. Every higher national debt will lead to higher interest rates, which will increase the debt, leading to higher interest rates. The only way out will be to have the IMF impose a solution. That will cause short-term intense expenditure cuts and tax rises. There may then be a long period of reduced growth the pay off the debt.