Labour Did Not Overspend And Neither Was The Deficit Out of Control

First, and it is important to state this, the Labour government was not responsible for the 2008 recession. The recession was caused by the housing bubble bursting in the US which led to subsequent financial crises in other countries.

One could argue, as the BBC’s Robert Peston does, that banks should have been under stricter regulation in the UK under the Labour government. However, this is easy to say with the benefit of hindsight and no other political party was arguing in favour of more regulation of the banking sector at the time. In fact, the Conservative party argued for less regulation of the banking sector. 

The government is said to be running a deficit if within a year it spends more than it receives in taxes. This deficit must be funded by borrowing which adds to the total amount of debt that the UK currently owes.

debt was not particularly high historically when the financial crisis hit

A deficit is not necessarily a problem – it is a way of keeping your spending constant. When you pay your heating by direct debit you are more than likely going to have deficit in winter when it is colder and be in credit in summer when it is warmer.

The problem comes when you have a structural deficit. This is when over the economic cycle, the UK is still running a deficit. Or to put it another way, we still have heating bills to pay even after completing our direct debit payments.

Talking about debt, without talking about our ability to pay it back is completely useless. This is why economists talk about debt as a percentage of GDP and as the Oxford economist Simon Wren-Lewis points out, the debt to GDP ratio was not particularly high historically when the financial crisis hit in 2008.

The coalition’s narrative that Labour was “out of control” with its spending is inaccurate

The reason why this ratio increased post-2008 was largely due to the recession. In fact, post-2010 when the Conservative coalition took over, this ratio increased from 78% to over 90%. Although the coalition has brought the deficit down, there is still a deficit which we must pay off. Naturally, this extra borrowing increases the overall size of the UK debt. Furthermore, by bringing the deficit down too quickly it has reduced our ability to pay back the debt by lowering GDP.

This is not to say the Labour government behaved fiscally responsibly during its term in office with over-optimistic forecasts and problems with fiscal rules. In fact, some praise needs to be given to the coalition for setting up the Office of Budget Responsibility in May 2010 to combat some of these issues.

However, the coalition’s narrative – emphasised by Michael Gove – that somehow the Labour government was “out of control” with its spending is inaccurate. The reason this narrative is still persisting has as much to do with Labour’s ineptitude to dispel this myth as the media coverage of the issue.

Most importantly, even if we consider the debt to GDP ratio too high under Labour, this is not a reasonable justification for the coalition to impose austerity in a recession where interest rates are at their lowest point. To go back to the heating analogy, air conditioning is useless when it is freezing outside.

If we knew that the financial crisis was about to happen then one could argue that Labour would have delayed some of the pre-crisis spending to help in buffering the impact of the recession. But this is easy to say with the benefit of hindsight. So on this basis, it is unfair to say that Labour “overspent”.

David Chivers is Lecturer in Economics, Exeter College at University of Oxford. This article was originally published in The Conversation.

Enjoyed this article?

Help us to fund independent journalism instead of buying:

Also in Disclaimer

Brexit Britain from Abroad: With May so Weak, EU Prepares for a Car Crash Brexit

Despite a strategy of trying to embraces allies across the European Union, Theresa May is facing the prospect og crashing out of the EU. Talks are at a stalemate. Unless the logjam is resolved Brexit will get messier. Discalimer looks at Brexit from outside eyes.

The Worst Government Ever? Then What Do You Call Corbyn’s Labour?

Theresa May's authority has collapsed but that does not mean her government will fall again. The odds are stacked against Labour. This is made worse by the fact that they are struggling to make headway - even against this government.

Catch Up: Brexit Exposes Britain to Greater Shocks

Catching up with some of the new thinking in think tanks, the New Economics Foundation looks at how Brexit exposes Britain to greater financial instability; the Resolution Foundations looks at Philip Hammond's budget choices on housing. Finally, the Fabians looks at the future of the unions.

Putin Smiles as Hard Brexiters Become his Willing Fools

Russia wants to cause the EU harm, and the best way to do that is to sow discord among the member states. There is mounting evidence that they have been interfering in Czech, Hungarian and Austrian elections and have links to far-right parties. Despite warning the Russian leader, Theresa May is ignoring growing evidence of Russian interference in the Brexit referendum.

Hate globalisation? Try localism, not nationalism

http://www.disclaimermag.com/umbraco/#there are changes afoot in the political economy of the world. Where there is globalisation, there are globalisation protestors. This is nothing new, but it is becoming mainstream. The antithesis of globalisation, nationalism, and the pursuit of your own country’s interests over those of everyone else, has bubbled back up in Europe. However, there is an alternative.