Ben Storrs, Press and Publicity Officer
At the beginning of the credit crunch questions focused on how responsible Gordon Brown was for building a financial economy dependant on the competitively minimal regulation that partially led to the crunch. The answer is Brown led the way to deregulation. Now the question is how well Britain is placed to deal with the problems.
A lot has been said about how “the cupboard is bare”, our “record debts” and the “largest expenditure since records began” but this conceals a few important facts. Firstly Gordon Brown lowered debt as a proportion of GDP from 45 to 30% by 2002. To put that into more perspective it was the lowest GDP debt of any G8 country by some margin. Unfortunately the next year Brown claimed to have abolished “boom and bust”, so ‘risk-free’ spending and debt shot up. But even now GDP debt is only about 50% (it’s difficult to tell precisely, but it will rise massively in the next 3 years) and in real terms (i.e. taking the effects of inflation into account) GDP debt was much higher post war.
So Labour have a good case when defending the national debt. Yet the problem is the budget deficit which is much more than the 3% that should incur an EU fine. There is no obvious way we can balance the budget in the next parliament because Britain is already saturated with taxes, and this is why we're in a very bad position to cope with the recession. The 50% income tax rate next year will be one of the highest in the world; our 24% national insurance tax rate is lower only than the equivalent rate in countries such as Romania, Belarus and Latvia. And many economists have argued we are already past the apex of the Laffer curve – so increasing taxes further will lead to less revenue. So although Japan and the US are up to their necks in debt, both countries tax revenue is less than 30% of GDP so both countries have the scope to recover – our taxes annually yield over 40% of GDP.
If courting bankers was the mark of a new Labour, the excessive spending is pure Old Labour. They have drained the country with high tax during periods of economic growth and in this sense the cupboard is bare, and we have been living beyond our means for the last twelve years. The criticism that Labour’s only policy is to throw money at the problem seems particularly apt. The fire sale of assets that has recently been announced may fly in the face of nationalisation and suggest New Labour is still here, but it may also be a desperate attempt of a party out of ideas to keep the economy from sinking.