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Wednesday, September 10, 2014

Labour's recklessness left Britain exposed

There has been an increasing tendency recently for Labour politicians to argue that the 2008 recession was entirely down to the banks and had nothing to do with Gordon Brown's government. Today's Times nails that flimsy piece of spin as nonsense.

The paper quotes an analysis by the Office for Budget Responsibility that shows that Labour was reckless with the public finances in the years before the financial crisis. They say that a combination of over-optimistic forecasts for tax receipts and a decision to ignore the demographic timebomb of an ageing population meant that the national debt rose at the second-fastest rate of 31 of the world’s leading nations between 2004 and 2007.

As a result the worsening state of the public finances left Britain exposed when the financial crisis struck in 2008, plunging the country into its deepest and most prolonged recession of the past century:

Speaking at the launch of the working paper, Crisis and Consolidation in the Public Finances, Robert Chote, the OBR chairman, described Britain’s decision to increase borrowing in the three years prior to the crisis as “unusual”, adding: “Others were trying to pre-fund the rising costs of ageing by getting the debt down in the good times.”

The OBR also showed that Labour took a far more optimistic view of tax receipts to justify its spending decisions than other contemporary forecasters. External forecasts for the deficit were about £10 billion more pessimistic than the government each year from 2003 to 2008, it said.

As a result, UK national debt rose by about 2.5 per cent of GDP between 2004 and 2007, faster than the likes of Greece, Italy and Portugal. Only five of 31 countries in the Organisation for Economic Co-operation and Development experienced a rise in public debt over the period and only Hungary reported a faster increase than the UK, the OBR said.

Labour made the decision to boost spending in 2002 to correct what it described as “decades of chronic under-investment in education, health, transport and housing”. To fund the plans, it chose to run a budget deficit of about 3 per cent of GDP annually.

However, the government’s projections were based on a fundamentally unstable economic strategy that assumed stronger than average UK growth was permanent. With hindsight, both the OECD and the International Monetary Fund say now that Britain was expanding faster than its potential and running an underlying deficit above the 3 per cent reported.

The extra GDP growth masked a structural borrowing rate of about 5 per cent of GDP that was “unsustainable”, Mr Chote said. The Treasury was not alone in its overestimation of UK potential growth, he added. Most forecasters at the time were equally guilty.

The crisis exposed Britain’s real economic position, revealing a previously unrecognised hole in the public finances equivalent to 8.6 per cent of GDP — the shortfall between tax receipts and spending, even with the economy functioning at full potential.

As annual borrowing quadrupled to fill the hole and compensate for a collapse in tax receipts in the recession, the national debt rocketed by £439 billion more than expected between 2008 and 2013 to £1.19 trillion.

Isn't it about time that Labour took responsibility for their economic mismanagement rather than trying to place the blame on others?
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