Monday, September 26, 2011

Brown’s fiscal mistake

Labour’s time in power can be divided into three periods, as far as the public finances go. First, borrowing was reduced to zero and below, cutting the national debt from 42.5% of GDP in 1996/97 to 29.7% in 2001/02. Then, a period of borrowing 2.3-3.3% of GDP a year, raising the national debt to 36.5% of GDP in 2007/08. And finally, all hell broke loose.

It’s the middle six years that are now the most contentious, when the government ran deficits that weren’t huge but were still on the large side given that the economy was doing well.

That said, there was a world economic slowdown around 2001-03, and the fiscal stimulus that resulted from extra borrowing probably helped the UK come through in pretty good shape. Indeed, Chris Dillow goes further, arguing that the longer pre-crisis period was one where government spending was an important prop to the economy – tighter fiscal policy would have meant less growth and potentially a bigger housing boom if interest rates had been cut to compensate.

It’s also debatable how much less bad things would now be if we’d gone into the crisis with a balanced budget rather than a 2.4% deficit. We could have had a bigger stimulus (and, hopefully, a smaller recession), or had the same stimulus with less borrowing overall (so smaller interest payments and, hopefully, slower spending cuts now) – which would have been better. But the flipside of going into the crisis in better fiscal shape, as Chris argues, is that we might have been in worse shape in other ways.

But there is one sense in which Gordon Brown unarguably got it wrong.

This graph shows government revenues relative to GDP (thick black line) compared with a series of Brown’s Budget forecasts (dotted coloured lines):

Year after year, Brown predicted the Treasury’s income was about to rise to 40% of GDP and above; in reality, it never even reached 39%. Now, public borrowing is hard to predict, and so a couple of years of undershooting is acceptable margin-of-error stuff. But by, say, 2004, it must have been clear that something was wrong with the forecasting assumptions: the money consistently wasn’t appearing as expected.

Brown should have rethought his tax and spending plans or at the very least his predictions. After several good years, the Treasury had – like the financial sector – become optimistic to the point of complacency. And so, as they don’t like to mention, had the Conservatives, who in 2007 signed up to Labour’s spending plans for the following years.


PeterC said...

Why is this article entitled "Brown's fiscal mistake". Surely the evidence would indicate "Brown's Fiscal good judgement" a more accutate one

Tom Freeman said...

Because, as the graph shows, his predictions were consistently mistaken.

Ali said...

It looks to me like he managed to balance the budget when he was sticking to Conservative spending plans. Promising that in '97 was the only time he got anything right. After losing the next 2 elections where the main choice between the two parties was Labour saying 'we'll spend more than them' the Conservatives obviously thought it was the only way back into government. If only politics could be about more than just a desire for power.

Robert said...

But of course in those good times we also have Brown mini recession nearly ending pensions, he then sold gold at the lowest and thought I know the banks need some freedom.
I think you can say labour was lucky and then the luck ran out

Fat Bloke on Tour said...


You carry forward a number of misconceptions regarding the economy - 2001 / 2008.

The growth was delivered in the face of a number of economic headwinds relating to the fall out of the dot com bubble, the uncertainty in the Middle East and a growing commodities boom. Consequently GB's record on the growth front was very good, delivering progress in the face difficult economic times.

Regarding the fiscal side of the equation you fail to take on board the other factors at play - aggressive tax planning in the corporate sector, fraud and the contractorisation of a number of industries and the people working in them.

That to me is the main reason for the continued undershoot of the tax revenues in this period. People were becoming more brazen and confident in their attempts to lower their tax bill. The political world never saw this coming and the civil service were not good enough to compete in this environment.

It maybe a case that continued growth in the face of economic headwinds caused complacency in the political world and misplaced confidence in the corporate world where the politics of success was the only game in town.

When profits and increased bonuses seem to be a given then was it any wonder that a greedy and out of touch corporate elite put all their efforts into "tax planning" with little left over to actually improve their companies in the real world? They set the tone and the contractors who read the Forger's Gazette decided to avenge IR35 with some very exotic company arrangements?

Regarding GB and his legacy the question you have to ask - would anyone else have done a better job?

I would suggest not - look what happened in 90/91 when the world got the sniffles and the UK was put on life support.

If GB had a problem then the issue was complexity and micro-managing.

However in his defence he was dealing with the politics of plenty where no-one could lose out if a change was made, so a lot of his behaviour was political and not economic.

Lesson for progressive politics -

Be true to yourself and your beliefs.
Appeasing the Torygraph and the Forger's Gazette is futile.
They will always hate you no matter your efforts.
They will always ask for more.