If the Conservatives win enough seats in the general election to retain power, it will be their reputation for economic competence and Labour's for the opposite that does it. Are these reputations deserved? Not as much as conventional wisdom has it, would be my answer.
The story we have been repeatedly told has three elements: first, Labour profligacy was responsible for the chaos the coalition inherited; second, the austerity of the past five years has produced a remarkable recovery; and, third, continuing on the same path is the way to return the economy to health.
Simon Wren-Lewis, who teaches macroeconomics at Oxford university, even labels the elements of this story myths. So what is true and what is less so?
In its latest World Economic Outlook , the IMF states that the UK’s cyclically adjusted fiscal balance was minus 6.8 per cent of gross domestic product in 2008 and minus 9.9 per cent in 2009. But in October 2008, it had thought the same deficit would be 2.9 per cent of GDP in 2008 and 2.8 per cent in 2009. The IMF has changed its view of the past. But nobody had that wisdom before the crisis.
What role, then, did fiscal mistakes play? The Office for Budget Responsibility concludes: “It is hard to argue that the tax and spending policies implemented in the early and mid-2000s were in themselves an important cause of the crisis and recession. But there were undoubtedly weaknesses in fiscal management during that period.”
Too fast Thus government spending did indeed grow too fast before the crisis. But the ratio of spending to GDP had been very low in 1999-2000. A period of faster growth in spending than GDP was justified. Again, the cyclically adjusted deficit should have been perhaps two percentage points of GDP smaller than it was. Yet if it had been, and if the ratio of net public debt to GDP had also been 10 per cent lower in 2008 than it was, the fiscal deficit and net public debt would still have soared. Since the government never found any difficulty in selling debt at very low interest rates, the difference in the debt service burden would have been negligible. Moreover, the pre-crisis ratio of debt to GDP was very low by historical standards.
So the view that the UK’s crisis was essentially due to Labour profligacy is false. This mistaken belief allows people to ignore the weaknesses of the private economy, which was more fragile than thought in those pre-crisis years.
Turn now to whether the recovery has vindicated the coalition’s austerity.
One response is that the coalition ended up delivering not its own plans but those of Labour's March 2010 budget, as is shown in a New Policy Institute paper . Yet Labour might not have delivered what it promised, particularly under Gordon Brown, prime minister from 2007 to 2010. Maybe it took George Osborne, Conservative chancellor of the exchequer, to deliver what Labour promised.
Another response is that fiscal tightening did indeed slow the recovery significantly. This is consistent with the OBR’s own analysis. When interest rates have reached a floor, fiscal tightening is bound to weaken demand and output, argues Profr Wren-Lewis. Moreover, even if aggressive monetary policy offsets fiscal tightening, it may impose its own costs via unsustainable asset prices or excessive credit expansion.
Yet the more fundamental point is that this has been a disturbingly weak and unbalanced recovery. True, it has brought forth a welcome improvement in employment, but only because of a collapse in productivity growth. Moreover, notes the NPI, the growth in self-employment has soared from just under 40,000 a year between 1987 and 2007 to almost 140,000 a year since 2009. Before 2007, self-employment accounted for 16 per cent of jobs growth; now it is 45 per cent. One must ask what sort of jobs these are. Self-employed jobs that do not pay much may well be better than nothing. But they are hardly a triumph.
What, then, of the next parliamentary term? There is a real difference between Conservatives and Labour on fiscal policy, though both promise tightening and not even Labour is prepared to argue for significant tax increases. This means fiscal adjustments will continue to be on the side of spending. The difference is that the Tories seek an overall fiscal surplus and Labour a surplus on the current budget. The former also means lowering spending to ratios to GDP barely glimpsed in half a century. Such a low level is unlikely to be achieved or, if achieved, sustained
In brief, my assessment of the records of both Labour and Tory-led governments is that neither party is competent. Neither showed healthy scepticism about financial services. Neither tackled the growing crisis in the supply of housing and consequent overdependence of the financial sector on lending secured against it. Under both parties, the economy has been too dependent for demand on household borrowing and spending. Not least, UK prosperity lags: in GDP per head (at purchasing power parity), the UK is behind not only the US, Germany and France, but also Singapore, the Netherlands, Sweden, Denmark and Finland. If productivity growth fails to recover, this relative position must grow worse.
The time has surely come to shift the focus from the obsession with fiscal deficits and debt. These were neither the cause of the crisis nor the solution. Whatever one thinks of the fiscal policies of the coalition, a weak and unbalanced recovery from a huge recession is not a vindication. The UK faces really big economic challenges. It confronts equally huge questions about its place in the world and in Europe, as well as its own constitutional future. Neither main party offers convincing responses to these challenges. Have no illusion: real competence is not on offer, either in economics or, in truth, much else. – Copyright The Financial Times Limited 2015
