I’ve devoted many blogs to criticising George Osborne’s macroeconomics, so for the sake of variety this post turns to a senior member of the current Labour party. Chuka Umunna is Labour’s spokesman on business, innovation and skills, and in this article for The Independent he discusses what Labour did wrong on the economy. Here is just one paragraph.
“In 2007, before the crisis hit, the UK government was running a deficit. By historical standards, it was small and uncontroversial – it averaged 1.3 per cent from 1997 to 2007, compared with 3.2 per cent beforehand under 18 years of Tory rule. And yet to be running a deficit in 2007, after 15 years of economic growth, was still a mistake. My party’s failure to acknowledge that mistake compromised our ability to rebuild trust in 2010 and in 2015. If a government can’t run a surplus in the 15th year of an economic expansion, when can it run one?”
The first two sentences say that Labour was actually more fiscally conservative than the Conservatives, and that the deficit in 2007 was small. No problem with that, although to imply that the small deficit in 2007 was uncontroversial is not right: many suggested at the time that it should have been smaller, with good reason. The next sentence and the last say that it would have been even better to have run a surplus, because the economy had been growing for 15 years. To which a macroeconomist can only respond - what?
Of course economies normally grow, in real and nominal terms. That means that if you want to keep the ratio of government debt to GDP stable (Labour’s target for this ratio was effectively 40%), you need to run budget deficits, not surpluses. A surplus, or even a balanced budget, will gradually reduce the debt to GDP ratio, because debt will not be growing but GDP will be.
What Umunna is saying here is much the same as George Osborne’s proposed rule: in normal times when the economy is growing run surpluses. But Osborne is saying that in the context of the current debt to GDP ratio of 80% of GDP. Umunna is implying that policy still made sense back in 2007 when the debt to GDP ratio was below 40%, the output gap was thought to be small and no one was expecting a global financial crisis. I cannot remember anyone before 2008 suggesting Labour's debt limit should fall over time. Yet Umunna says the mistake was so serious it helped lose Labour two elections.
I would love to know who the economists are that gave Umunna the advice that led to this article. Certainly not any of the 79 that signed this letter, or advice from the Economist or FT. You would think that the advice would have to be pretty convincing, given how this line plays into the Conservative narrative about how Labour profligacy was the cause of 2010 austerity, and that therefore it is Labour rather than Osborne and Cameron who are responsible for the slowest UK recovery from recession since almost forever.
If you think I’m being too hard, perhaps over-interpreting a couple of sentences, here is another extract:
“reducing the deficit is a progressive endeavour – we seek to balance the books because it is the right thing to do. We will not stand by while the state spends more paying interest every year to City speculators and investors holding government debt, than we do on people’s housing, skills or transport. It will be far too late to leave this to the 2020 general election campaign.”
Would he give the same advice to UK businesses: refrain from borrowing and focus on paying back your debt? Somehow I think not. The Conservatives have a kind of excuse for deficit fetishism - it is a useful device for shrinking the state. That excuse should not apply to senior Labour figures.