The myth of Labour’s excessive borrowing: why it’s time to fight back

Annie Powell

One of the most persistent myths in British politics is that Labour cannot be trusted with the economy. Following the financial crisis, the coalition parties revived and enhanced this myth with the mantra that Labour’s borrowing caused all our economic woes. Over and over we’ve heard that the previous government borrowed too much; that it failed to fix the roof while the sun was shining; that the Labour party has an incurable addiction to debt. As propaganda campaigns go, it’s been pretty successful.

Perhaps it’s not surprising that one of the few successes of a government led by a Tory PR man is a propaganda initiative. But it’s an achievement that Labour facilitated, for when the government began to attribute the effects of the global financial crisis to Labour’s “excessive” borrowing, Labour didn’t fight back. If there was any logical reason at all for Labour’s silence on this issue, it was the notion that the public, following the worst financial crisis since the Great Depression, were in no mood to hear Labour cry, “Not guilty!”

That may have been so, but if Labour wanted to choose matters for which to accept liability, they chose badly. Under-regulation of the financial sector? Yes, like the rest of the world. PFI?  Definitely. But not borrowing, which in 2007 (ie before the effects of the financial crisis) was 36 per cent of GDP, 6 per cent less than it was in 1997 after 18 years of Conservative government (see Chart 1).

Chart 1

Labour did not, by any measure, “fail to fix the roof while the sun was shining”. The roof wasn’t broken, and had Labour borrowed less to further fortify the roof, it would still have been blown off altogether by the hurricane that was the global financial crisis. International comparison is a particularly good way of setting the record straight. In the year Labour left office, the UK’s debt was 79 per cent of GDP (including debt incurred through financial inventions, which is not standard as some will be recouped but which allows for easier comparison between countries). In the same year, Germany, the widely-praised economic power-house, had a national debt of 83 per cent of its total output, also including financial interventions (source: Eurostat, Oct 2012).

Unfortunately, Labour’s silence belies all of this. In the time since the general election, the deceitful narrative of Labour’s uncontrollable borrowing has gained real traction; one need only look at Labour’s fear of the ‘b-word’ to measure its success. This matters not only because it dents Labour’s economic credibility, but because it prevents the opposition from forcefully advocating what this country desperately needs: direct government borrowing for capital investment.

As many commentators have been pointing out for some time (and with increasing frustration), the logic of this policy is glaringly obvious. At the moment the government can borrow at negative real interest rates. The flat-lining economy is in desperate need of a stimulus. Capital investment tends to have a very high multiplier effect and this country is in real need of new infrastructure, particularly new council and affordable housing and improved transport links. Considering the human impact of our anaemic economy, the fact that Labour is constrained from advocating such policies by government spin is nothing short of tragic.

But there is no reason for Labour to continue submitting to this spin. Some might argue that this particular ship has sailed; that if Labour were to challenge the government’s narrative, they should have done so straight away. While it would have been better to do so in 2010, this really is a case of better late than never, not least because the government’s poor handling of the economy should weaken its version of events and make the public more receptive to Labour’s fight-back. Once the Labour party starts to tackle the myth of excessive borrowing, it will be much easier to push for government-funded investment.

There are some who might say that advocating such a policy would be playing straight into the government’s hands. That Cameron and Osborne and Clegg will say, “Aha! We always told you that Labour was addicted to debt, and they still haven’t learned their lesson!” But Labour can go on the offensive too, and they have the facts on their side. If this is to work, Labour needs to take a leaf from the Tories’ book and unremittingly drive its message home. Recently a few Labour MPs such as Angela Eagle and Emily Thornberry have spoken out against the idea that Labour’s borrowing is responsible for our economy troubles, but without the support of the top brass and a concerted initiative, their voices are lost on the wind.

Another counter-argument to this idea is that while the government’s message of “Labour borrowed too much and this has caused all our problems” is simple to convey, the counter arguments are too complex and will not penetrate public consciousness. I disagree. I don’t think it’s difficult to say “actually, it’s not true that Labour borrowed too much. Before the financial crisis hit, Labour was borrowing less than John Major was in 1997.” Angela Eagle recently demonstrated on BBC Question Time that it’s possible to get this message across simply and eloquently, saying that there wasn’t “a recession in 38 countries because [Labour] spent too much on schools and hospitals.” Nor is it difficult to convey the message that when the economy clearly needs a stimulus, the government should take advantage of exceptionally low global interest rates.

This would free up Labour in debates and media appearances. Currently when asked the question “so, you would borrow more?”, Labour spokespeople are afraid of giving a direct answer, and nothing turns the public off more than evasion. Instead, Labour should say that, yes, initially the party would take advantage of record low interest rates to borrow for investment in much needed infrastructure. This will help boost the economy, create jobs, and mean that borrowing will reduce as a proportion of the (growing) GDP. This should be contrasted with borrowing to fund welfare payments (to be fair, Labour do this already).

One final thought. Following the second world war, debt was well over 200 per cent of GDP. Yet this was the era in when the NHS was established and the government funded a large house building programme. And yet, miraculously, the world didn’t explode. This reveals the extent of the government’s scaremongering about our current levels of national debt.

8 Comments:

  1. Smiler

    The trouble with this article is that it doesnlt really address the morality of borrowing money now to pay for a welfare state and to make future generation pay for it.
    The borrowing is always done with an assumption that there will be economic growth to help pay the debt and inflation to erode the value of the debt.
    The trouble is neither of these things are under the control of the government as we have clearly seen over the last 30 years.
    Additionally even when we get growth we do not necesarily get the tax revenue necessary to pay off the debt.
    If the labour party does not learn this lesson then they sholuld be never be allowed back into power and i doubt that the voters will believe them again.

    Reply
    • Garin Linnington

      ‘Smiler’, trouble is your assertion that only ‘Labour’ borrows and runs a deficit, is incorrect. British governments have always borrowed since the British state was formed in the 18th century, with big peaks mainly after wars. The Tories also borrowed, even in the supposed good times of the mid/late 1980s. The difference is that Labour tax the rich more, rather than cut taxes for the rich as the current Tory govt has and is planning to do. Result, by cutting taxes for the rich and creating a low wage economy (e.g. Tory govt post 2008), tax revenues fall and the deficit expands. Not that we necessarily borrow too much. So we are not all in it together, under the Tories the bottom 20% have suffered most with wage cuts, welfare cuts and fall in standard of living. The OECD recently stated that trickle down neoliberal economics doesn’t work and to balance inequality and actually improve economic growth, the rich must pay more tax. The basic facts are that all parties in govt borrow, all govts tend to run deficits to FUND future growth, the Tory govt didn’t cause the crashes of 1929, or the early 1980s, or the early 1990s, and Labour didn’t cause the crash of 2008. But the Tories are in the here and now causing the rich to get richer and the poor to get poorer.

      Reply
  2. Chris Fergusson

    Loved the article Emma, I would also support what George is saying here, money hasn’t just evaporated from the Global Economy, it’s held by the 1%. A free market economy doesn’t work and whatever is done it will be hard to get them to relinquish their ever tightening grip. High rates of unemployment are as bad if not worse than unions holding employers to account as at least the later has some discussion going on as to how to get money back to those who will spend it and keep the economy moving!

    Reply
  3. ajith lekshmanan

    We should also raise the point that during the financial crisis, mainly caused by irresponsible actions of greed driven bankers that the Labour government intervened to prevent a financial melt down by borrowing to nationalise failing banks. The Torys cricitised this intervention, if they had their way we will probably be facing a crisis maybe worst than that in Cyprus. The bankers not only got away with it, but can do so again, as the coalition government is not keen to bring effective measures to prevent the recurrence of such irresponsible actions.

    Reply
    • SIMON

      Unemployment is one problem, but underlying problems like poverty cannot be solved by low unemployment alone. Figures show that there are many people who are in work, and are paid so little, that they are still in the poverty trap and rely on state benefits. Conventional wisdom has always led me to believe (and a view i hold today) that education is the key to eradicating poverty: Better qualified people earn more and tend to have more rewarding careers (I know that this is not always the case) The problem is as part of the continuing austerity, education, more specifically university is not as easily available as it was, and therefore the means to get out of the cycle is no longer an option for many.

      Reply
  4. George Talbot

    This is a useful defence of Labour’s fiscal policy but like the Coalition’s defence of its austerity, it ignores causes. Globally, too much is being saved. If this surplus is not borrowed, demand falls causing a slump. Borrowing and spending the surplus restores demand but debts rise.

    A proper understanding of the problem suggests two solutions; less saving and more new investment. Raising real wages acts on both; reducing saving and increasing demand and investment. I say nothing new but this is not possible with free labour markets, and selfish employers and free capital. So wages that are too low are accepted.

    Debt write-offs that extinguish savings would deflate the Ponzi-like credit mountains built by big finance. Savers would suffer but trying to repay massive debts while the savings they service remain would crash the economy. Everything balances at zero as Keynes quipped!

    Recovery may occur spontaneously after enough capital has been destroyed but a revolution may intervene!

    Islam still forbids usury and requires investment risks to be shared. This suggests the privileges given to savings should be reduced. National governments cannot manage their economies while capital is free to go where it lists.

    Reply
  5. Paolo Sanviti

    In this situation of politics debilitation and of deep economic crisis, the national debt with the unemployment, the closing of shops and industries, is provoking an avalanche effect.

    Reply
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