Tony Blair, Gordon Brown and Ed Balls' Economic Legacy

Written by Warwick Lightfoot Tuesday, 31 August 2010 18:27
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The new Labour project was fundamentally flawed economically. 

 It failed to recognise the supply performance issues that challenge the UK economy and the way that many of the central problems arose out of a ratio of public spending that is too high in relation to national income. New Labour's rhetoric and fiscal rules honed by Gordon Brown with the help of Ed Balls were a mask for a new Keynesian agenda. 

Higher public expenditure and higher government borrowing dressed up in words such as prudence that pretended they were something else. The fiscal rules far from being an effective restraint on public spending and government borrowing accommodated any level of government spending and the creation of a significant budget deficit when the economy was operating at the peak of the economic cycle and over heating. New Labour's huge increase in government spending aggravated the British economy's long-term structural supply-side challenge at a time when it was about to become more difficult to manage as China, Indian and other emerging economies become more competitive. The spending, taxation and regulation of New Labour made the traded goods and services sectors and the manufacturing sector in particular less internationally competitive. As well as seriously aggravating these long-term structural supply performance problems Gordon Brown created the conditions for the acute fiscal crisis that  is now overlaying these structural supply performance matters. 
New Labour's domestic spending agenda also exposed the limitations of the 'smarter', 'more efficient', public sector reform agenda. The UK public sector has been subject to a succession of reform and management shake ups to improve its performance over the last thirty years. Careful analysis by the ONS shows that increased resources did not result in an increase in output that matched the additional money and resources employed by the public sector. Productivity in the public sector fell during the Blair Brown period.
Today the New Labour economic legacy is a fiscal crisis, a public sector that is too large and an economy that has been consuming beyond its productive capacity. Public spending was planned and increased in the context of an unrealistic judgment about the UK economy long-term trend rate of growth. The deleveraging that is taking place as a result of the banking crisis will mean that recovery from the recent slump in output will be slow and protracted. It is naive to assume that these problems can simply be avoided by higher public spending and maintaining government borrowing. The economy's capacity to supply was damaged by New Labour's spending and taxation before the credit crunch. Labour attempts to improve labour supply through education and training in many respects represented a miss-specification of the problem and hindered  rather than helped. The slump in output has exposed Britain's supply-side and fiscal problems and it has also further reduced the economy's productive capacity. 

Warwick is the author of Sorry We Have No Money - Britain's Economic Problem

Last modified on Tuesday, 22 March 2011 17:19

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