The IPPR's excuses can't cover up the last Government's dire fiscal irresponsibility

The IPPR has a new research note out, you can read it here.  They claim:

"Analysis of the historical data on debts and deficits shows the UK’s fiscal position in 2007–08, immediately ahead of the recent recession, was reasonably sound."

They provide some context, they are trying to support this political strategy of the Labour leadership:

"Reports of a recent shadow cabinet meeting suggest its strategy is to insist the deficit was not caused by overspending or fiscal carelessness. It will continue to argue that deficits have increased in all developed economies as a result of the financial collapse and recession, and that the government’s finances were in a healthy position before the crisis began."

The first important point to note is that no one has accused the last Government of fiscal irresponsibility before 2000.  While they stuck to the previous Government's spending plans the fiscal position continued to improve as it had since the end of the early nineties recession and the country ran a healthy surplus.

After 2000 the problems began as the Government put in place a massive rise in spending, which led Britain to leave the rest of the OECD far behind.  Spending continued to rise and, while there was a particular spike connected to the recession which was seen around the world, that spike was considerably larger in Britain and took spending to well over 50 per cent of national income.

Despite a strong economy and healthy tax revenues from a booming financial services industry in particular, that translated into increasingly large deficits relative to the rest of the OECD.  The advantage from the relatively healthy recovery of the public finances from the previous recession was eroded and then lost.  Even before the latest recession, Britain was borrowing substantially more than the OECD average and had been for several years.

[caption id="attachment_22310" align="alignnone" width="469" caption="General government financial balances, surplus (+) or deficit (-), per cent of nominal GDP, UK and Total OECD, 2000-2010"][/caption]

The extent of the problems in Britain's public finances are widely acknowledged, here are just a few of the sources that show the extent of the problem:

    • In November 2009, an IMF report put Britain's structural primary balance at the second worst in the G20 advanced countries.
    • Eurostat statistics show that Britain had the third highest deficit of any country in the EU27 in 2009, behind only Greece and Ireland (both being bailed out).
    • A report from the Bank for International Settlements in March 2010  showed that Britain has among the worst long term fiscal problems in the developed world.  They reported that:


"The results plotted as the red line in Graph 4 show that, in the baseline scenario, debt/GDP ratios rise rapidly in the next decade, exceeding 300% of GDP in Japan; 200% in the United Kingdom; and 150% in Belgium, France, Ireland, Greece, Italy and the United States. And, as is clear from the slope of the line, without a change in policy, the path is unstable. This is confirmed by the projected interest rate paths, again in our baseline scenario. Graph 5 shows the fraction absorbed by interest payments in each of these countries. From around 5% today, these numbers rise to over 10% in all cases, and as high as 27% in the United Kingdom."

Even with a substantial fiscal adjustment they still projected an unsustainable rise in our debt ratio.

The IPPR report avoids these basic realities primarily by avoiding the context, not including a comparison with other countries in their time series data.

The Labour party can try to blame the problems on an international recession.  The reality though, is that when the economic tide goes out, you find out who is swimming naked.  Gordon Brown's economic failure was that a decline in our economic competitiveness and fiscal position from 2000 meant that, despite a long run of economic growth, we were poorly prepared for any kind of downturn and increasingly exposed to one.

That doesn't excuse the Conservatives of some responsibility for what went wrong.  A far more legitimate Labour response to attacks on their fiscal responsibility would be to point out that, for a period immediately before the crisis, the Conservatives were pledging to match Labour's spending plans.  To that extent, the fiscal crisis is a result of a collective failure of the leaderships of both major political parties.  Attempting to pretend that their fiscal policy was responsible will not wash though, and it is inappropriate that a charitable think tank like the IPPR is trying to write such disingenuous talking points for a political party.

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