Daily Archives: October 2, 2011

Labour re-writes the past – their economic management

The Labour hierarchy has worked out its narrative on the economic mess they created. It runs like this:  NuLabour in power may have made some mistakes,  but these were minor and apparent only with hindsight, while  the real culprit is the global economy in general and the USA’s obsession with sub-prime mortgages in particular. This is not only a grotesque lie but a stupid one because it can be  readily exposed.

It is true that Britain could not have avoided the global recession entirely, but the Labour Government could have massively mitigated our present plight by exercising restraint in public spending  and responsible regulation of the banks and their ilk.

The  reckless spending is easily demonstrated:

Labour ran a surplus for each of their  first four years of government:

1998       £    703 millions

1999      £11,976 millions

2000       £16,697 millions

2001       £ 8,426 millions

Total  1998 – 2001  surplus of £37,802 millions

Labour ran a deficit for  the rest of their time in government:

2002    £19,046  millions

2003    £34,004  millions

2004     £36,797  millions

2005     £41,355  millions

2006     £30,755  millions

2007     £33,718  millions

2008     £68,003  millions

Total 2002 – 2008   Deficit of £263,678  millions

2009   £152,289 millions

2010   £148,774  millions

Total  2009 -2010   Deficit of £301,063 millions

Net total debt accumulated  in the period 1998 – 2008 £225,876

Net total debt  accumulated in the period 1998-2010 £526,339 millions

Figures taken from http://www.guardian.co.uk/news/datablog/2010/oct/18/deficit-debt-government-borrowing-data.

The figures tell their own dramatic story:  the Blair and Brown governments continued spending recklessly throughout their period in office (1997-2010).  They achieved small surpluses in the first four years because of the favourable conditions created by the prudent  Ken Clarke budgets  prior to the financial year 1997/98 and Blair’s commitment to sticking to the Major Government’s spending plans for their first two years in office.

From 2002 to 2008 Blair and Brown ran substantial deficits despite the economy  being in a boom. When Lehmann Bros failed in September 2008 Labour had increased the national debt by £225,876. That in itself should have told them  (and the other major political parties)  that the spending was reckless.  A prudent government  – as Gordon Brown constantly claimed NuLabour was – should have been paying down public debt  during  the boom so that when the inevitable downturn  came there would have be the opportunity to maintain or increase public spending to  keep up aggregate demand.

The exact dimension of the recession/depression which followed the collapse of Lehmann Bros in 2008 may have been  impossible to predict, but the persistent deficits  meant that in any downturn the UK public deficit would either have  to rise significantly or public spending would have to be cut substantially.

Because Blair and Brown spectacularly failed to satisfy the paying down of debt in good times part of the Keynsian bargain meant there was not only no  room to increase public spending when the downturn came, but  even  maintaining spending at the level it had been during the  boom in the downturn was impossible.

Brown attempted to disguise what was happening by creating a distinction between increasing government spending  on capital projects (good) and the funding of the day-to-day running of public bodies (bad).  Capital project spending was deemed to be allowable even if it placed the national finances in deficit but day-to-day expenditure  was not allowed to add to the deficit.   This was a bogus  distinction because there is no objective way that  expenditure can be cleanly divided between the two types of expenditure. For example, if the hospital capacity is increased by new capital investment it means eventually that extra costs will arise from the day-to-day running of the new hospitals.  It is also a  value judgement to say that capital expenditure is more valuable than day-to-day expenditure or that capital expenditure is justified because it produces new public projects. In the end debt is  debt however it is generated.

Brown’s formula  meant  there was  very weak restriction on the growth of capital projects. To obfuscate matters further, Brown  produced a formula whereby the books only had to balance  over periods of years, periods which he frequently changed as the figures failed to show what he wanted.

But the figures for government spending and  borrowing do not tell the whole story.  Under Blair’s control the Labour Party became if anything more committed to the  idea that free enterprise is best than the Tories.  This lead them to greatly increase the  use  of the Tory created  Public Private Partnership (PPP) and   Public Finance Initiative (PFI)  schemes.

PPP  commonly involves the taxpayer and private companies sharing the cost of public projects  (with the private contractors commonly being remunerated by drawing an income from  providing services for which the public pays  over many years) while  PFI  schemes required the contractors to provide the full initial cost of a public project which is  then paid back with interest  out of taxes over periods of time as long as 35 years. ( PFI contracts normally  result in the private contractor owning the capital product of the contract, for example, a new school or hospital, then leasing it back to the public body who pays for it over a long period, during which time the private contractor normally has a further contractual  money spinner such as maintain the school or hospital for which again the taxpayer pays.  )

The honest way for governments to finance projects is to borrow the money (which they can do much more cheaply than any private business) and add the loan to the national debt. Brown kept most of the PPP/PFI expenditure off the books by likening it to a mortgage which was only paid off gradually. He argued from this that it was unreasonable to add the entire cost of the projects onto the national debt  and that only the annual cost should be added each year to the public accounts (http://news.bbc.co.uk/1/hi/uk_politics/8112758.stm). The problem with this was that it severely disguised the full extent of public expenditure.

Exactly how much public debt has been run up through PFI and PPP financed projects is uncertain because of the length of the contracts which commonly have renegotiation clauses at various points built into them and the habit PPP and PFI contractors have of presenting public bodies with demands for more favourable terms, failing the granting of which  they will  walk away from the contract.   But if exact figures cannot be arrived at ball park figures can.  In 2010 the NHS Health Direct website carried an article which estimated that the cost of PFI contracts entered into since Labour came to power in 1997 was probably in the region of £300 billion (http://www.healthdirect.co.uk/2010/02/how-labour-government-squanders-300-billions-with-pfi-schemes-2.html).  To put that in context,  the National Debt when Labour came to power, which had been accumulated over 300 years,  was £352 billion (http://www.debtbombshell.com/history-of-national-debt.htm).  The large majority of the PFI/PPP  cost s do  not  figure in the official  National Debt.

The failure of the  Blair and Brown governments to behave sensibly and honestly during the boom years resulted,  after Lehmann’s collapse in 2008, in  a very rapid deterioration of the public finances  with a deficit of  £68 billion in 2008 (in itself a frightening figure) turning into one of £152 billion a year later. Amongst the Government’s responses to the deteriorating financial situation was, unbelievably you may think, to  keep pushing new  PFI projects forward  on the grounds that this would help keep aggregate demand up. The problem was that credit suddenly became much more expensive so the cost of the  that the PFI contracts rose. (http://www.publications.parliament.uk/pa/cm201011/cmselect/cmpubacc/553/553.pdf). However,  because   PFI costs were kept largely off the books Enron-style, this  suited the Brown Government because it meant that expenditure could be kept up without it being added to the official  National Debt.

The failure of  regulation

The over spending and dishonest accounting was dangerous and damaging in itself, but it was made unreservedly toxic by the failure of Blair and Brown to control both the growth in credit and prevent the development use of ever more exotic and  removed from reality  financial vehicles of the derivatives variety such as Collateralised Debt Obligations (CDO)  and  Credit Default Swaps (CDS). – https://livinginamadhouse.wordpress.com/2011/09/21/another-day-another-lethal-financial-derivative/.

Margaret Thatcher abolished credit controls in the 1980s.  Blair and Brown not only failed to  reinstate them,  but positively celebrated the surging  growth in credit from credits cards, bank loans and,  most of all, mortgages.  Banks showered their customers  with offers of credit cards and bank loans; mortgage providers allowed multiples of earnings  of four, five and  even six times earnings and 100% mortgages .  In the last few years  before Lehmann’s collapse in 2008 mortgage providers were offering more than the value of the property  with 105%, 110% and finally 125% mortgages  in the manic belief that house prices would continue rapidly upwards  forever  and wipe out the  negative equity  in the property on which they had loaned more than the property was currently worth.

Just to make the debt pie really sticky, those granting mortgages and other credit  allowed the borrowers to self-certify their earnings and  applications for credit cards and bank loans were passed without any meaningful check on what were the borrowers’  financial circumstances. This resulted in a good deal of  mortgage fraud, people running up massive credit card debts using ten, twenty or even more cards and large numbers of people (especially those who bought in the last year or two of the housing bubble)  with mortgages far too large for them to service comfortably even when house prices were rising and  re-mortgaging at a reasonable rate  easy, mortgages which became utterly beyond them when the crash came.

Blair and Brown added to the domestic  economic  debt and house inflation jubilee by allowing immigration to get out of hand.  In their 13 years in Government Labour allowed net migration into Britain estimated at  3 million (http://www.migrationwatchuk.org/briefingPaper/document/144).  This massive influx coupled with the ease of mortgages (which foreigners could obtain as readily as native Britons)  poured much  inflationary oil on the housing price waters  and almost certainly substantially drove up credit card debt as well.

If Blair and Brown had done no more than introduce credit controls which restricted mortgages by insisting on a reasonable deposit – say fifteen  per cent – allowed  a mortgage of no more than three times salary,  banned self-certification of earnings and insisted on proper verification of the borrower’s general  financial circumstances,   much of the debt poison would have been avoided. Even with massive amounts of immigration, house prices would have remained lower because there was less credit chasing them. Lower house prices would have reduced the amount of credit generated by people taking out second mortgages to spend on things other than their property and made people less inclined to take out other forms of debt because they would not have felt  as giddily rich  as they did in the over-heated house price  years running up to 2008.

To the vast indebtedness created by New Labour spending must be added the financial fall out of the banking crisis. This  was the consequence of criminally lax regulation.   The Blair/Brown Governments started the process of pumping vast amounts of public money into the banks with the effective failure of Northern Rock in September 2007, its nationalisation in 2008 and the partial nationalisation in 2008 of Royal  Bank of Scotland and what became the Lloyds Group after Lloyds TSB had its arm twisted by the Government to take over Halifax Bank of Scotland.  There were also been one or two smaller interventions such as  those involving the Dunfermline Building Society and  the Bradford and Bingley (a building society converted into a bank).   In theory, all the money used to rescue these financial businesses will be recovered eventually when the  government sells its stake in the banks. However, the “in theory” is a very live issue because if the shares were sold now it would be at a  very substantial loss and there is no prospect of the shares doing anything but remain stagnant at bets for the foreseeable future because of the continuing  global financial woes in general and the plight of the Euro in particular.

The upshot of all this state intervention to support  Britain’s financial system  is that the official National Debt (which does not include most the PFI/PPP expenditure)  broke the £1 trillion mark in January 2011. It will continue to  rise rapidly even under the Coalition’s plans to  eliminate the structural deficit, that is, the deficit which exists even when the economy is working flat out,  because of the on-going massive UK public spending deficits   which will be around for a few years (http://uk.finance.yahoo.com/news/Does-national-debt-matter-yahoofinanceuk-1107255620.html).

That is what the Blair/ Brown Governments are responsible for. Not only the havoc they have wrought in office  but the mess they have left behind.

What could the Blair/Brown Governments have done?

Within the constraints of  the various treaties affecting commerce  Britain was signed up to  by 1997 – primarily the EU and WTO Treaties –  what might a prudent government have done  during  13 years  in office?  They could have instigated credit controls on all forms of  lending from mortgages to credit cards; insisted that the banks had much higher levels of liquid reserves;  banned all financial instruments which  extended the question of ownership and liability beyond the  original contracting parties, forced the banks  to run their  retail and investment activities as separate companies and then  offered no government guarantees or other  support to the investment companies  and limited their exposure to other countries’ sovereign debt.

These activities should all have been possible even though we are  within the EU and signed up to the WTO Treaties because  what competition law internationally requires at present is that all subscribers to a treaty are treated equally within the various national jurisdictions covered by the treaty.   However, we all know how perverse and dishonest the application of EU law has been and it is possible that some or all of the measures could have been ruled illegal by Brussels. In that case the Gordian Knot  could and should have been cut by Britain’s withdrawal from the EU.

What has Labour to say about this catastrophic management of the national finances?

Labour  are shameless. At the 2011 Labour Party Conference the shadow chancellor Ed Ball, the man with a good claim to have been Gordon Brown’s closest supporter and aide during Brown’s period as Chancellor,  blithely shrugged off Labour’s grotesque mismanagement of the economy with this:

“Don’t let anyone tell you that Labour in government was profligate with public money – when we went into the crisis with lower national debt than we inherited in 1997 and lower than America, France, Germany and Japan.”  (http://www.telegraph.co.uk/news/politics/labour/8790476/Labour-Party-Conference-2011-Ed-Balls-refuses-to-apologise-over-Labours-economic-record.html).

It is true that the official national debt represented as a proportion of UK GDP was lower in 2008 than 1997  (36% as against 42% in 1997  see http://tinyurl.com/GDP1997-2010). The first thing to note is that the  official national debt in 2008 was a fudged figure which excluded most of the PPP/PFI costs. If they had been included,  it is probable that the 2008 official percentage figure would have exceed the 1997 figure

But  the absolute amount of money also  matters,   both because there is a greater amount to service(the ease of which is subject to general  economic conditions at home and abroad)  and because if a recession shrinks the economy the percentage shoots  up (By  2010 the National Debt  had risen to from 36% to 52% of GDP, partly due to the growing annual public deficit but also because the economy shrank  by over 5% (http://www.economist.com/node/15770872).

Balls continued in his Conference speech with “And don’t let anyone say it was public spending on public services here in Britain which caused the global financial crisis.”.   Do not fret Mr Balls, no one has suggested that you and your friends were powerful enough to do that.  The point is you were in a position to mitigate its effects.

Just in case anyone had the bad taste to keep on pointing out NuLabour’s disastrous folly (that’s being kind)) Balls  urge the electorate to adopt a collective amnesia: “For families today – struggling to pay the bills, worrying about their jobs – being told about the great things Labour did in government isn’t much comfort… it doesn’t pay the bills, help get a job or secure the pension.”  So there you have it, the Blair and Brown years were glorious and the fact that Britons are becoming rapidly more insecure and poorer nothing to do with Balls or any of his Brownite cronies.

Like the Bourbons, the Labour hierarchy has learnt nothing , but unlike them, has  forgotten a great deal of inconvenient facts.  The  extent to which Labour is still living in a fantasy world is their alternative to the Tory deficit cutting plan.  Instead of aiming to eradicating the structural deficit by 2015,  which would produce a projected National Debt of £1.4 trillion (http://business.timesonline.co.uk/tol/business/economics/article7145924.ece), they wish to merely halve it.  This would add many tens of billions more to an already frightening level of public debt. That is the NuLabour mentality in a nutshell:  that of the person buying on the “never never”.

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