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From Prudence to Profligacy: How Gordon Brown Undermined Britain's Public Finances

Nicholas Sowels
p. 77-93

Résumé

Having begun by pursuing an extremely conservative fiscal policy during the late 1990s, Gordon Brown, as Chancellor of the Exchequer and then Prime Minister, presided over a massive expansion in public spending to improve public services. This expansion of spending was justifiable in many ways, given poor investment in public services during the Thatcher-Major years. But it was arguably not sufficiently financed through taxation, and direct taxation in particular. The result was a run up of public deficits prior to the current financial and economic crisis, which broke the government's own fiscal rules. This in turn prepared the way for a substantial deterioration in public finances when the current crisis broke, a deterioration which may take years, if not decades to set right.

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Texte intégral

Introduction

  • 1  Labour Party, 1997.
  • 2  Keegan, W., 2004, p. 199.

1New Labour’s 1997 election manifesto set out clearly the Party’s new approach to managing public finances. As part of its strategy to break with its reputation of “tax and spend”, and to gain economic credibility both with the public and with the financial markets, New Labour committed itself to respecting Conservative Party spending plans for two years. Similarly, the manifesto pledged there would be no increase in income taxes, for at least five years1. At the same time, New Labour declared that it was deeply concerned about strengthening Britain’s economic stability, breaking with the “boom and bust” of the past. To this end, Gordon Brown as Chancellor of the Exchequer immediately granted “operational independence” to the Bank of England within days of being in office. This was very much his decision, made largely on the advice of his special advisor Ed Balls. While Tony Blair had agreed to them preparing the policy as early as 1995, it took the country and the markets by surprise. It was a “political coup” which did much for Gordon Brown’s and New Labour’s economic reputation2. At the same time, the Brown-Balls team began putting into place a new framework for the fiscal policy.

The Intent of Prudence and Stability

  • 3  For one of the many accounts of the “Granita” political agreement between Tony Blair and Gordon Br (...)

2In a clear effort to break with the past and to become electable, especially following its fourth defeat in 1992 in the middle of a deep recession, “New” Labour began to formulate a pro-market approach to economic policy during its years in opposition. The details of this approach were largely the work of Gordon Brown, following the arrangement he had reached with Tony Blair, whereby the latter would run for the Labour leadership after John Smith’s death in 1994, while Gordon Brown would have responsibility for formulating and then implementing New Labour’s economic and social policy3.

  • 4  Ed Balls trained as an economist at Oxford and Harvard Universities, before working as a journalis (...)
  • 5  Quoted here from Keegan, op. cit., p. 132.

3Gordon Brown, in turn, was heavily supported in developing New Labour’s economic policy by Ed Balls, a trained economist who became Gordon Brown’s economic advisor in the autumn of 19934. They had met in the wake of sterling’s exit from the European Exchange Rate Mechanism (ERM), while Ed Balls was writing a Fabian Discussion Paper, arguing that “ERM membership cannot provide, but instead requires, a credible, flexible and transparent domestic macroeconomic policy framework and a medium-term strategy for industrial regeneration”5. The Bank of England’s independence was seen by Ed Balls as an essential part of this new framework.

  • 6  Lee, S., 2009, pp. 19-20.

4More generally, Gordon Brown and Ed Balls began recreating New Labour’s economic policy approach, which was to be distinctly different from the policies of “old Labour”. This was to involve a fundamental change in Gordon Brown’s personal political philosophy.  In the 1970s, his “politics [had been] firmly in the mainstream of the Scottish Labour Party [...] couched in impeccably socialist terms and expressed in a commitment to community democracy, a planned economy and the empowerment of workers”6.

  • 7  Ibid., p. 41-8.
  • 8  Colloquially referred to in Britain as “beer and sandwiches at No 10” [sic].

5A decade later, with the reshaping of the Labour Party, Gordon Brown, now significantly influenced by Ed Balls, moved towards accepting many of the legacies of the Thatcher-Major years, at least as far as overall management of the economy was concerned. He too became drawn to Adam Smith, not only as the proponent of the “invisible hand”, but for Smith’s infusion of morality in the organisation of society7. Out went “old Labour” policies of intervening in the economy using fiscal policy to “fine tune” growth, industrial policy to support British industry directly through nationalised companies, or government investment in industry, and any significant form of social dialogue with the unions8 and management. In came central bank independence, “prudence” in managing public finances, the light regulation of industry and finance, as well as the embracement of globalisation.

6In terms of public finances and fiscal policy, the 1997 manifesto clearly stated that a future Labour government: would not change income tax rates (for at least five years); would respect spending plans set out by the Conservatives for two years, and lastly that it would adopt “strict rules” concerning government borrowing. These rules were subsequently refined and formally presented to Parliament in the Budget of March 1998. They were:

  • the Golden Rule: over the economic cycle the Government will only borrow to invest and not to fund current expenditure; and

    • 9  HM Treasury, 1998 (a).

    public debt as a proportion of national income will be held over the economic cycle at a stable and prudent level9.

  • 10  HM Treasury, 1998 (b).
  • 11  HM Treasury, 1998 (a).
  • 12  HM Treasury, 1998 (b).

7The “stable and prudent level” of public debt was subsequently specified as net public debt not exceeding 40% of GDP10. Furthermore, the Code and other government policy pronouncements clearly stressed New Labour’s attachment to strengthening the “transparency”, “stability”, “responsibility”, “fairness” and “efficiency”11. Also, the new policy regime made it clear that “[i]t would be a serious mistake to divert fiscal policy away from this end in an attempt to manage short-term demand and inflationary pressures in the economy.  Monetary policy is better suited to this task”12. This was a clear repudiation of Keynesian demand management, echoing Jim Callaghan’s landmark speech to the Labour Party conference in 1976.

  • 13  Sawyer, M., 2006.
  • 14  Reinhart, C., Rogoff, K, 2010.

8To be sure, the formulating of rules and especially the Golden Rule did involve somewhat arbitrary choices. It is hard, for instance, to make the exact distinction between current spending and capital spending: for example, is paying for the training of additional teachers, doctors and nurses an immediate consumption of resources, and so current spending? Or is it an investment, to be classed as capital spending? Also, it may be asked to what extent investment in physical infrastructure can be assimilated to capital spending by private companies, in as far as public infrastructure does not actually create any income stream, as public services are often “non-marketable” (i.e. they are not sold in the market)13. Definitions of the economic cycle are also unclear, and Gordon Brown did change the goal posts on this in the mid-2000s, as we shall see in the next section. More generally, economists generally regard public debt criteria as somewhat arbitrary, in as much as the relationship between national debt and growth is not very clear.  Clearly, where public debt appears to become uncontrollable, as recently witnessed in Greece and Ireland, for example, financial markets finish by demanding risk premia in terms of higher interest rates on new government bond issues. Also, Carmen Reinhart and Keneth Rogoff, two leading American economists who have much studied the impact of financial crises, have found long-term, cross-country statistical evidence which suggests that once public debt rises above about 90% of GDP, it does indeed lead to lower growth.  But they are not entirely certain as to the reasons, which may be due to higher interest rates, greater taxation or governments regulating financial markets in order to capture national savings14. Finally, it is salutary to recall that Britain’s national debt stood well above 200% of GDP in 1945. Yet that did not stop Old Labour from nationalising the Bank of England, the coal industry, the railways and other industries, nor from creating the National Health Service (NHS) and setting up a universal benefits and pensions system – albeit with significant US financial support.

  • 15  See for example, OECD, 2002.

9Still, the overall attempt to create an explicit framework for running fiscal policy and the casting aside of demand management very much expressed the economic consensus which had evolved in the 1980s and 1990s in the advanced capitalist countries. During these decades, many governments pursued fiscal consolidation, and moved towards drafting normative rules to provide hard guidelines for policy. Inflation targeting, for example, first emerged in New Zealand in the late 1980s, and was subsequently adopted in many other English-speaking countries, including Britain. Similarly, basing fiscal policy on rules became widespread in the 1990s, as shown by their incorporation into the “convergence criteria” of the Maastricht Treaty (1992), as well as the European Union’s subsequent Stability and Growth Pact. The latter was adopted in Dublin in December 1996, and restates the need for members of Economic and Monetary Union to respect public deficit and debt ceilings of 3% and 60% of GDP respectively15.

10On the tax side, New Labour did stick to its tax pledge of not raising income tax rates. In particular, the 40% upper rate, which had been implemented by the Conservatives in 1988, remained in place.  It was a “red line” of the Thatcher legacy which New Labour refused to cross for fear of losing electoral support from “Middle Britain”.  It only came into question towards the end of 2008, when, facing the full gales of the financial crisis, Alistair Darling (Gordon Brown’s successor as Chancellor) announced the introduction of a 45% rate in April 2011. In the event, a new rate of 50% for income over £150,000 was introduced in the last Labour budget of March 2010, and was retained by the subsequent Conservative budget of June 2010.

11However, Gordon Brown did use “fiscal drag” substantially to help raise revenue generated by income tax and indeed other taxes (i.e. allowing thresholds to rise less quickly than inflation and salaries, so that a greater share of taxpayers’ revenues is progressively taxed at higher rates). As a result, income tax expanded quite notably as a share to total public sector receipts during New Labour’s first government, and then levelled off (see Table 4).  New Labour’s policy was also to expand tax revenues through increases in stamp duty on property and stock market transactions. Various other types of indirect taxes also contributed to the government’s revenues, as we shall see in the next section. Dubbed “stealth taxes” by the government’s (Conservative) critics, these taxes include Value Added Tax (VAT), excise on alcohol and fuel, etc. They are generally considered to be less visible to the public and so less damaging politically – hence the term “stealth taxes”. But, indirect taxes are far more regressive in nature than income tax, because they are either flat-rate (tax hikes on beer and petrol) or proportional (VAT, stamp duty).  They therefore increase the overall tax burden on poor households more than on rich households.

Gordon Brown and New Labour’s Public Finance Record

12New Labour came to power in 1997 at a generally favourable moment in Britain’s post-war economic history. Though widely held as a political disaster at the time, sterling’s ERM exit had given the authorities (then the Chancellor, not the Bank of England) the possibility of continuing to lower interest rates, and letting the pound devalue.  Unusually, this did not lead to higher inflation as was much feared at the time: deindustrialisation, privatisation, labour market deregulation and a second bout of mass unemployment in the early 1990s had finally brought about a considerable fall in wage increases.  As a result, the weaker pound did help restore Britain’s competitiveness and was not accompanied by a surge in inflation.  The Conservatives under John Major had also become more pragmatic, after the poll-tax debacle and a much-reduced Parliamentary majority following their re-election in 1992.  In the face of a deep recession, they allowed the deficit on public spending to rise to 7.5 percent of GDP, in 1993. When growth returned, they managed to implement a considerable improvement in public finances, holding down spending growth while raising taxes, and by 1997 the British economy was experiencing stable growth, low inflation, falling unemployment and improving government finances.

  • 16  See for example, Toynbee, P., 1997.

13The basic story of “Iron Chancellor” Brown’s first period in office is thus largely one of capitalising on this favourable situation, supported by a buoyant international economy, to improve the state of public finances substantially.  In committing itself to Conservative spending plans, New Labour did down spending forcefully – to the point where Gordon Brown infamously cut benefit to lone parents in 199716. With the economy growing steadily, the result was a significant shift of public expenditure into surplus, along with a fall in public spending as a share of GDP. Total Managed Expenditure (TME) went from 39.9% of GDP in financial year 1996/97 to 36.3% in 1999/2000: its lowest level since the early 1960s (see Table 1).

Table 1: Public Sector Spending and Receipts (as a % of GDP)

             

Pub. sect current expenditure

Total managed expenditure

Public sector current receipts

Net taxes and national insurance contributions

North Sea Revenues

1965-66

31.1

39.6

38.1

31.2

0

1970-71

32.7

42.7

43.3

36.3

0

1980-81

40.6

47

42.2

35.5

1.5

1990-91

35.6

39.4

38.4

34.9

0.3

1996-97

37.6

39.9

36.4

34

0.4

2000-01

35

36.8

38.6

36.3

0.4

2004-05

37.6

40.5

37.3

35.2

0.4

2005-06

38

41.1

38.2

35.9

0.8

2006-07

37.6

40.8

38.5

36

0.7

2007-08

37.6

40.9

38.6

36.2

0.5

2008-09

39.4

43.3

37.2

35.5

0.9

2009-10

42.8

47.4

37

34.1

0.3

Source: Tables B2 and C1, HM Treasury, Public Sector Finances Databank, 7th December 2010.

  • 17  Chote, R., et al., 2010.

14The impact on public debt was equally impressive. With the annual spending and taxation delivering budget surpluses, plus a £22½  billion lump-sum windfall earning from the sale of G3 mobile telephone radio frequencies (equivalent to 2.3% of GDP)17, public sector net debt fell from 42.5% of GDP in 1996-97 to 30.7% in 2000-01. (In terms of the gross debt Maastricht criteria, debt fell from 51% of GDP to 38.9% over the same period – see Table 2).

Table 2: Components of Net Borrowing (Columns 1 to 4) and Debt (Columns 5 and 6): as a % of GDP

              

Gen. govt.

Public corps.

Public sector

Treaty deficit*

Pub. sect.

net debt

Gen. govt.

gross debt*

1963-64

2.5

0.3

2.8

2.5

1970-71

-2.1

1.5

-0.6

-2.1

3.8**

63.4

1980-81

3.7

1.1

4.8

3.7

46

53.6

1990-91

1.4

-0.4

1.0

1.4

26.2

32.6

1996-97

3.7

-0.2

3.4

3.9

42.5

51

2000-01

-1.5

-0.3

-1.9

-1.5

30.7

38.9

2004-05

3.5

-0.2

3.3

3.5

34

40.1

2005-06

3.0

-0.1

2.9

3.0

35.3

42

2006-07

2.6

-0.3

2.3

2.6

35.9

42.9

2007-08

2.7

-0.4

2.3

2.7

36.5

43.6

2008-09

6.7

0.0

6.7

6.8

44.1

55.9

2009-10

11.3

-0.2

11.1

11.4

53.6

71.3

* On Maastricht basis. **1975-76.

Source: Tables A4 and A6, HM Treasury, Public Sector Finances Databank, 7th December 2010.

15At the same time, however, New Labour made much of wanting to improve public services, notably by raising capital spending. One way of partly doing this, without increasing direct spending by the government, lay in the expansion of private finance for public infrastructures. This was a policy launched in 1992 by John Major’s Chancellor of the Exchequer at the time, Norman Lamont: the so-called Private Finance Initiative (PFI). It is based on the idea of paying private companies to build and manage public infrastructures, which after a period of usually 25-30 years then become fully-owned public assets. Under present public accounting rules, such spending is largely “off balance sheet”, with only the annual fees paid to contractors entering government accounts.

  • 18  House of Lords, Select Committee on Economic Affairs, 2010.

16Since PFI was set up it has been controversial. On the one hand, both the Major and subsequent Blair and Brown governments have argued that these schemes help off-load risks involved with infrastructural finance to the private sector. Also, in line with prevailing the neo-liberal view of public organisations, both the Conservatives and New Labour have made much of the fact that PFI has helped bring in private sector management practices into public services, thus making them more efficient. On the other hand, the cost of borrowing to finance private-built infrastructure will almost always be higher than borrowing through public finance, as a credit-worthy government is certain of borrowing from the capital markets at lower rates of interest than private companies can. Also, privately financed and run projects clearly need to generate profits, which in turn lead to higher costs. It is not within the scope of this article to examine this issue in detail, which is complex: according to a recent House of Lords report, for example, PFI projects do indeed perform better in terms of respecting delivery dates than does traditional procurement, etc. They also limit the risks of cost overruns, which by definition are born by the private contractor. That said, some projects, notably London Underground’s Metronet, have failed spectacularly, and there are clear concerns about the transparency of future costs involved. Accordingly, the House of Lords committee has recommended that the government publishes more clearly the expected liabilities involved in PFI “alongside figures for Public Sector Net Debt”18.

  • 19  Timmins, N., 2009.

17Under the Conservatives, the number of projects remained fairly limited, with by far the most important being the Channel Tunnel. With New Labour, this was to change, as PFI or Public Finance Projects as they were re-dubbed, allowed the government to create new infrastructures in education, health, transport, etc. without this being accounted for as direct government spending. As a result, it was estimated that by early 2009 more than 800 projects had been signed, for a total capital value of about £68 billion. At the same time, “public sector commitments to pay for these, in terms of capital, maintenance and services” ran to £215 billion, through to 203219. In other words, New Labour has generated quite a substantial future public spending flow which has not been given sufficient visibility to date.

18As for government spending itself, the start of the 2000s marked a fundamental change in New Labour’s fiscal policy. It was freed from its electoral commitment in 1997, and both public spending and public sector debt had fallen significantly as shares of GDP.  Consequently, New Labour was able to increase public spending strongly after securing a renewed Parliamentary majority (of 167 seats) in the 2001 general elections.  Spending in health and education subsequently increased substantially both in real terms, and as a share of GDP. This was especially the case for the NHS. Following New Labour’s pledge of bringing the United Kingdom’s share of GDP spent on health up to the European average of 8%, the NHS experienced its biggest rise in funding since its creation (see Table 3).

Table 3: Public Expenditure on Services (as a % of GDP)

1996-97

2000-01

2004-05

2006-07

2009-10

outturn

outturn

outturn

outturn

estimated
outturn

1. Gen. public services, incl.

4.7

3.9

3.5

3.5

3.8

   pub. and common services

0.8

0.8

1.0

0.9

1.0

   international services

0.4

0.4

0.5

0.5

0.6

   public sector debt interest

3.5

2.7

2.0

2.1

2.2

2. Defence

2.8

2.6

2.4

2.4

2.7

3. Public order and safety

2.1

2.1

2.3

2.3

2.5

4. Economic affairs, incl.

2.9

2.4

2.8

2.8

3.2

   enterprise and econ. dev.

0.5

0.5

0.5

0.5

0.6

   science and technology

0.2

0.1

0.2

0.2

0.2

   employment policies

0.3

0.4

0.3

0.2

0.3

   agriculture. fish.& forestry

0.7

0.5

0.4

0.4

0.4

   Transport

1.2

0.9

1.3

1.5

1.6

5. Environment protection

0.5

0.5

0.6

0.7

0.8

6. Housing. etc. (a)

0.7

0.6

0.7

0.9

1.1

7. Health

5.4

5.5

6.8

7.0

8.5

8. Recreation. etc. (b)

0.7

0.8

0.8

0.8

1.0

9. Education

4.8

4.6

5.4

5.4

6.3

10. Social protection

14.2

13.0

13.5

13.2

15.8

EU transactions

-0.7

-0.3

-0.1

-0.1

0.0

Pub. sector expenditure

38.2

35.7

38.8

38.8

45.6

Accounting adjustments

1.7

1.1

1.8

2.0

2.0

Total Managed Expenditure

39.9

36.8

40.5

40.9

47.5

TME in £bn at 2008-9 prices

421.8

449.1

544.7

580.1

656.8

Notes: (a) Housing and community amenities; (b) Recreation, culture and religion.

Source: HM Treasury, Ch. 4 “Trends in public expenditure”, Public Expenditure Statistical Analyses, 2010.

19Other public services saw their spending as a share of GDP essentially maintained, and so too benefited from greater expenditure following on from stable and buoyant growth. The same holds for income transfers (“Social protection”) which expanded in some areas, in particular where aimed at fighting child poverty and enhancing the resources flowing to pensioners. In other areas like unemployment pay – the so-called Jobseeker’s allowance – the lid on benefits was held down tightly, partly for fiscal reasons, and partly to ensure that labour market “incentives” were firmly set to encourage people to work. As a result, the share of GDP taken by transfers remained quite stable in the first decade of New Labour’s years in office, and only expanded significantly with the onset of the financial and economic crisis in late 2007.

20Examining the effectiveness and efficiency of the substantial increases in public spending falls outside the scope of this paper, though the overall assessment is usually mixed: public services are deemed to have generally improved under New Labour, but not by as much as was hoped, given the financial efforts made. What is clearly of interest here, however, is that New Labour’s willingness to improve services – shared by both Tony Blair and Gordon Brown – did put an increasing strain on public finances by the mid-2000s.

21Overall, Gordon Brown, as Chancellor, presided over an increase in Total Managed Expenditure from 36.8% of GDP in 2000-01 to 41.1% of GDP by 2005-06. Thereafter spending did fall marginally to 40.9% of GDP in 2007-08, before rising again strongly with the onset of the financial and economic crisis. While tax receipts were also rising in real terms, they did not fully match this rise in spending. As a result, net public sector borrowing grew quite substantially in the first half the 2000s, rising to 3.3% in 2004-05 (or 3.5% with Maastricht accounting – see Table 2). Thereafter, above-trend economic growth (i.e. above the Treasury’s estimate of potential growth of 2.5% at the time), together with somewhat higher taxation and a slowdown in spending growth, did lead to a narrowing of the public sector borrowing, up until the crisis.

  • 20  HM Treasury, 2004.
  • 21  In real terms (2008-09 prices), based on the author’s calculations.

22Tax revenue did therefore rise strongly during these years. This was partly thanks to overall growth. As Gordon Brown exuberantly proclaimed on numerous occasions, Britain was experiencing its longest period of sustained growth, since the War... and even since the start of the industrial revolution20. Public sector receipts up until the crisis were thus buoyant, rising from an equivalent of £385 billion in 1996-97 to £562 billion in 2007-0821.

Table 4: Composition of Public Sector Revenue

Outturn

Outturn

Outturn

Outturn

Projection

1996-97

2000-01

2004-05

2007-08

2009-10

Income tax (a)

24.7

27.7

28.1

27.7

28.3

Tax credits (b)

-0.8

-0.2

-1.0

-0.8

-1.2

Corporation tax

9.6

8.5

7.5

8.4

6.9

Petroleum revenue tax

0.6

0.4

0.3

0.3

0.2

Capital gains tax

0.4

0.8

0.5

1.0

0.4

Inheritance tax etc. (c)

0.6

0.6

0.6

0.7

0.5

Stamp duties

0.9

2.1

2.0

2.6

1.0

National Insurance

16.2

15.8

17.2

18.3

19.7

Value added tax

16.1

15.3

16.1

14.7

12.8

Fuel duties

6.0

5.9

5.1

4.5

5.4

Tobacco duties

2.8

2.0

1.8

1.5

1.7

Spirits, wine, beer, etc. (d)

2.0

1.7

1.7

1.5

1.8

Betting and gaming duties

0.5

0.4

0.3

0.3

0.3

Air passenger duty

0.1

0.3

0.2

0.4

0.4

Insurance premium tax

0.2

0.4

0.5

0.4

0.5

Environmental taxes (e)

0.0

0.1

0.4

0.3

0.4

Customs duties and levies

0.8

0.5

0.5

0.5

0.5

Total HM Revenue & Customs

80.7

82.5

81.9

82.3

79.5

Vehicle excise duties

1.5

1.1

1.0

1.0

1.1

Oil royalties

0.2

0.2

0.0

0.0

0.0

Business rates

4.8

4.3

4.1

3.9

4.8

Council tax etc. (f)

3.5

3.7

4.4

4.3

5.0

Other taxes and royalties

2.6

2.2

2.6

2.7

3.4

Net taxes and NICs

93.3

94.0

94.2

94.1

93.8

Interest and dividends

1.5

1.7

1.3

1.6

1.1

Other and adjustments (g)

5.2

4.3

4.5

4.3

5.0

Total current receipts

100.0

100.0

100.0

100.0

100.0

Total in £bn, 2008-9 prices*

385.4

471.9

501.1

561.7

486.7

Notes: (a) gross of tax credits; (b) counted as negative income tax; (c) includes capital transfer tax and estate duty; (d) Spirits, wine, beer and cider duties summed here by author; (e) Landfill tax, climate change levy and aggregates levy, summed here by author; (f) Council tax / Community Charge/ Domestic rates; (g) Gross operating surplus, rent, other receipts and adjustments.

* Author’s calculations using public spending data to calculate the GDP deflator.

Source: Institute for Fiscal Studies website: at http://www.ifs.org.uk/​fiscalFacts/​taxTables, retrieved on 6th January 2011.

23The composition of public revenues under New Labour appears to have varied most during Gordon Brown’s first Chancellorship, which saw the share of revenues from income tax rise by 3%, whereas the shares of corporation tax, VAT and Council tax/Community charge/Domestic rates fell by about 1%.  Thereafter, the contributions to revenue remained relatively stable through to the start of the crisis. Only stamp duty saw its contribution rise significantly from the start of the first New Labour government through to the crisis, while contrary to the accusations frequently levelled at the government, “stealth taxes” on fuel, tobacco, spirits, wine, beer & cider duties actually contributed a lower share to public sector receipts in 2007-08 than they did in 1996-97 (see Table 4).

Breaking the Fiscal Rules and the Great Recession

  • 22  HM Treasury, 2010 (c).

24It is today frequently argued that Gordon Brown gave up being the “Iron Chancellor” on the road to improving public services, and seeking to ensure that New Labour remained in office by sustaining high public spending growth.  Given his alleged surrender to profligacy, he is criticised for having undermined public finances before the onset of the crisis, or “Great Recession”, so that the authorities’ present room for manoeuvre is very limited. George Osborne, for example, the incoming Conservative Chancellor, made much of New Labour’s fiscal permissiveness in his first Budget statement, in June 2010. He claimed acerbically that the Golden Rule would be missed to the tune of £485 billion over the cycle22.

25A less partisan assessment, which by no means amounts to an absolution, has been given, among others, by the independent Institute for Fiscal Studies (IFS). In evaluating New Labour’s fiscal record, the IFS summarises:

  • 23  Ibid.; Chote et al., 2010.

“...over the same ten years [i.e. 1997 to 2007] the vast majority of other leading industrial countries reduced their borrowing by more than the UK. And most also reduced their debt by more.  So while the UK public finances were in better shape when the financial crisis began than they were when Labour came to power, the UK was in a worse position relative to most comparable countries”23.

  • 24 Chote, R., Emmerson, C., Frayne, C., 2005.
  • 25  Barrel, R., Kirby, S., Metz, R., Weale, M., 2005.

26Yet hindsight is, as they say, “a wonderful thing”. Before the crisis broke out in 2007, concerns were certainly expressed about New Labour’s increases in public spending. In 2005, the IFS did warn that public spending was excessive after such a long period of growth, leading to a substantial structural deficit24. Yet at the same time, the NIESR (National Institute for Economic and Social Research) opined that given the UK’s growth, even if spending did not meet the Golden Rule, the consequent results would generally be modest25.

  • 26  Elliot, L., Atkinson, D., 2007, p. 54.

27When he was still Chancellor, Gordon Brown did indeed fiddle with the definition of when the cycle began and when it would end, in order to meet the Golden Rule. By re-dating the start of the cycle to 1997, instead of 1999 as it had previously been defined, he was just about able to claim that the government was meeting the Golden Rule. Others were not so convinced by this slight of hand. Indeed, Larry Elliot and Dan Atkinson (both journalists at The Guardian) remarked wittily that the “notion of the ‘economic cycle’... [had been] transformed into the Indian rope trick of public finances”26.

28Gordon Brown can indeed be accused of having been overly optimistic about Britain’s growth prospects and hence likely tax receipts on the one hand and too willing to spend money to improve services on the other hand. The combination of providing substantial sums of money for services, permanent reform in many areas, often aimed at encouraging market-style practices and hence employing financial incentives to raise the output of services, etc., did mean that public money was not always spent as efficiently as could have been possible.

29Similarly, while the government did raise the share of “net taxes and national insurance contributions” in GDP in the immediate years before the crisis (from 35.2% in 2004-05 to 36.2% in 2007-08 – see Table 1), its overall willingness to let taxes pay for services was constrained, and so the public deficits piled up. Also, though income tax continued to be the largest source of revenue, there is a case to be made that Gordon Brown became increasingly reliant on the buoyancy of companies and financial services in topping up revenues (through corporation tax and stamp duty especially). “Prudence” had given way, if not exactly to profligacy, then at least to a certain insouciance about the sustainability of New Labour’s economic policies and its model of public services. This model was based on the premise of persistent economic growth, led notably by the City and Britain’s deregulated financial services. Such growth, in turn, provided the tax funding and/or the possibilities of almost-limitless borrowing to finance services. At the same time, market-oriented reforms in the management of services were seen as the key to making them more productive, though the evidence for this is mixed.  On balance, public services under New Labour did become more effective in meeting public needs, but not necessarily as efficient in their use of resources as the government had hoped.

30When the financial crisis broke out, the entire basis of this model broke down. Gordon Brown as Prime Minister was forced into stepping in forcefully to support the banking sector and financial services: the so-called “light-touch” regulation of financial services had led to a disaster, as British banks had to be bailed out massively. The Brown government also found itself having to support aggregate demand (through the 2.5% cut in VAT announced from December 2008 to the end of 2009, for example), while juggling with collapsing tax revenues as economic activity slowed precipitously (see Table 4). Not surprisingly, Britain’s public deficit ballooned to proportions, not seen since World War II: in 2009-10 net borrowing exploded to over 11% of GDP (see Table 2).

  • 27  Stiglitz, J., 2010, p. 253.

31Gordon Brown’s real failure, from this point of view, was not so much to mismanage public finances as Chancellor (and then Prime Minister) while the going was good. Instead, it lay more in his inability to envisage a major crisis in world finance and how this would impact on the type of social-liberal economy and society Britain had developed into. In this, he was of course not alone: officialdom world-wide was essentially caught by surprise. As Joseph Stiglitz (Nobel laureate in economics and critic of neo-liberalism) observes, the consensus among the policy-makers in the international community was self-reinforcing.  There were plenty of voices warning about the dangers of financial deregulation, global imbalances, over-indebtedness, throughout the 2000s.  They included reputed economists and not just critics of the market economy and capitalism. But by definition, these were not the people the policy-makers would take seriously and listen to27.

Conclusion

32Gordon Brown, as shadow Chancellor and then Chancellor, held wide-ranging responsibilities in shaping New Labour’s economic and public policy programme. His views on society and policy, as well as his subsequent actions in office, shaped by his close collaboration with Ed Balls, were vital in integrating many parts of the Thatcher-Major legacy into the New Labour agenda. Not surprisingly, this led him first to consolidate New Labour’s economic reputation, making economic policy more “rules-based” and respecting the imperatives of fiscal austerity.

33With New Labour’s re-election in 2001, he was then able to orchestrate a large increase in public spending, to help improve services that were widely seen to have been run down during the years of Conservative government.  If Gordon Brown did not exactly throw caution to the wind during the prosperous years before the present crisis, he certainly tried to have his cake and eat it: massive resources were poured into public services, especially health and education, and this growth in spending was not matched by enough higher taxation.  New Labour was just as keen as the Conservatives to present itself as a party of low taxation, even if its record in this field is more nuanced.  As a result, Gordon Brown may rightly be criticised for having undermined public finances, even though the headline figures hardly indicated a dramatic deterioration against the background of Britain’s long period of sustained growth.

34Yet, in his enthusiasm for market forces and deregulated finance – albeit tempered by his Scottish moral sentiments – Gordon Brown does appear to have been blind to the possibilities of a major financial and economic crisis that would shake the neo-liberal global economy which had been progressively put into place since the late 1970s.  Though he did substantially increase spending on public services and raise funding to fight some forms of poverty, he also gave a free hand to finance and international capital.  When the crisis did finally come, it plunged Britain’s public finances into dire straits, from which they will take years, if not decades, to emerge. So far this has not led to a substantial re-ordering of the economy. The beneficiaries of neo-liberalism have scarcely been held to account or seen their economic freedoms curtailed. The long term costs of the Great Recession in Britain look set to fall largely on those not responsible for it, and they may well be socially devastating.

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Bibliographie

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Notes

1  Labour Party, 1997.

2  Keegan, W., 2004, p. 199.

3  For one of the many accounts of the “Granita” political agreement between Tony Blair and Gordon Brown as well as the emergence of Ed Balls as an economic advisor to Gordon Brown, ibid., pp. 127-149.

4  Ed Balls trained as an economist at Oxford and Harvard Universities, before working as a journalist at the Financial Times. He subsequently became the Treasury’s Chief Economic Advisor (1999-2004), before being elected to Parliament in 2005. He was Economic Secretary to the Treasury from May 2006 to June 2007, and then appointed Secretary of State for Children, Schools and Families in Gordon Brown’s government from June 2007 to May 2010.

5  Quoted here from Keegan, op. cit., p. 132.

6  Lee, S., 2009, pp. 19-20.

7  Ibid., p. 41-8.

8  Colloquially referred to in Britain as “beer and sandwiches at No 10” [sic].

9  HM Treasury, 1998 (a).

10  HM Treasury, 1998 (b).

11  HM Treasury, 1998 (a).

12  HM Treasury, 1998 (b).

13  Sawyer, M., 2006.

14  Reinhart, C., Rogoff, K, 2010.

15  See for example, OECD, 2002.

16  See for example, Toynbee, P., 1997.

17  Chote, R., et al., 2010.

18  House of Lords, Select Committee on Economic Affairs, 2010.

19  Timmins, N., 2009.

20  HM Treasury, 2004.

21  In real terms (2008-09 prices), based on the author’s calculations.

22  HM Treasury, 2010 (c).

23  Ibid.; Chote et al., 2010.

24 Chote, R., Emmerson, C., Frayne, C., 2005.

25  Barrel, R., Kirby, S., Metz, R., Weale, M., 2005.

26  Elliot, L., Atkinson, D., 2007, p. 54.

27  Stiglitz, J., 2010, p. 253.

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Nicholas Sowels, « From Prudence to Profligacy: How Gordon Brown Undermined Britain's Public Finances », Observatoire de la société britannique, 10 | 2011, 77-93.

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Nicholas Sowels, « From Prudence to Profligacy: How Gordon Brown Undermined Britain's Public Finances », Observatoire de la société britannique [En ligne], 10 | 2011, mis en ligne le 01 mai 2012, consulté le 24 juin 2017. URL : http://osb.revues.org/1136 ; DOI : 10.4000/osb.1136

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Nicholas Sowels

Maître de Conférences à l'Université Panthéon-Sorbonne Paris 1

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