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This contribution is not an attempt to offer any original research but rather it offers a synthesis of the weight of judgement on the economic performance of the New Labour government. When all is said and done, one can argue that the current UK model strongly resembles the Swedish of the 1960s, exposure of the traded sector of the economy to strong competition and adjustment assistance to allow workers to return to jobs.

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1This note is not an attempt to offer any original research but rather it offers a synthesis of the weight of judgement on the economic performance of the New Labour government.

  • 1  OECD Survey of the UK Economy Oct. 2005

2There is no doubt that the macro economy has done well. There are doubts, as we shall see about the future, but the recent OECD report on the UK is generally positive “The stability and resilience of the economy has been impressive and labour and product markets are among the most flexible in the OECD, but structural economic performance judged against a range of indicators can be further improved.”1 The most impressive indicator is of course the reduction of unemployment, combined with targeted anti poverty measures. Dixon and Pearce of the IPPR conclude :

“The British welfare state is changing. Until 1997, Britain sat alongside other Anglo-Saxon countries within the family of “liberal” welfare states of Gosta Esping-Anderson’s famous typology.

3The last eight years have seen Britain evolving away from this model, retaining its best features while adopting some key ideas from Scandinavian countries.”2 In fact one can argue that the current UK model strongly resembles the Swedish of the 1960s, exposure of the traded sector of the economy to strong competition and adjustment assistance to allow workers to return to jobs.

Macro economic policy – how it differs from the Eurozone

4The government claims that the macro policy framework which underlies this is the key to its success. By keeping borrowing down and interest rates relatively low the government is able to afford increases in social spending. These arte targeted to give incentives to work rather than to remain out of work.

5Former Chief Economic adviser to Gordon Brown, Ed Balls has set out the framework in a number of papers. Credibility of policy with limited discretion is seen as the heart of policy.

6In contrast to the Euro-zone, the Government set inflation targets but leaves the Bank of England to set interest rates to achieve them. The immediate result of this policy was that in the period May Oct 1997 short term interest rates rose, but long term interest rates fell sharply, indicating that the government had easily created positive expectations about its commitment to keeping to inflation targets. The government sets budgetary policy in line with own “prudential” rules:

  • budget balance over business cycle

  • the “Golden Rule” budget target based on current spending and revenues, so borrowing for investment tolerated.

7This means that in a recession there is no automatic pressure to cut spending or raise taxes in a pro-cyclical manner.

  • 3  Balls, E. -“Open Macroeconomics in an Open Economy” Scottish Economic Society/Royal Bank of Scotla (...)

8Ed Balls argued financial markets are not perfect and can be led by such “signalling”.3 There has been very little pressure from financial markets to curb public spending. The Retaliation has been pre-empted.

9The decision to stick to conservative spending plans for the first 2 years may well not have made sense from the point of view of the efficiency of public services but by signalling the ability to control spending the government won the right in the yes of the markets to raise spending later.

Macro economic performance

10In the period since 1999 UK performance has been somewhat better than in the Eurozone, if not by quite as much as the government claims.

11Growth has been better than Euro area. Inflation has been lower (till this year) and so far public debt lower, but may be edging up.

Macro Economic Performance in the UK the US and Eurozone 1999-2006

Real GDP Growth 

1999

2000

2001

2002

2003

2004

2005

2006

Average/

Total 

UK

2.9

3.9

2.3

1.8

2.2

3.1

2.4

2.4

20.9 

US

4.4

3.7

0.8

1.9

3.0

4.4

3.6

3.3

25.1 

Euro area

2.8

3.7

1.7

0.9

0.6

1.8

1.2

2.0

14.7 

Inflation annual rate 

1999

2000

2001

2002

2003

2004

2005

2006

UK

1.3

0.8

1.2

1.3

1.4

1.3

2.0

2.1

11.4 

US

2.2

3.4

2.8

1.6

2.3

2.7

2.8

2.6

20.3 

Euro area

1.2

2.2

2.5

2.3

2.1

2.1

1.8

1.3

15.4 

Unemployment % 

1999

2000

2001

2002

2003

2004

2005

2006

UK

6.0

5.5

5.1

5.2

5.0

4.7

4.9

5.2

5.2 

US

4.2

4.0

4.8

5.8

6.0

5.5

5.1

4.8

5.0 

Euro area

9.4

8.4

8.0

8.4

8.9

8.9

9.0

8.7

8.7 

General Government Liabilities as a share of GDP

1999

2000

2001

2002

2003

2004

2005

2006

UK

39.8

36.9

33.5

34.3

34.7

37.0

38.7

40.4

US

44.3

39.0

38.0

40.8

42.8

44.3

47.2

49.9

Euro area

54.1

52.3

52.7

55.0

56.1

56.7

57.7

58.1

Source OECD Economic Outlook June 2005

12The one element where the government cannot claim to have outstripped other economics is productivity. There has been a long term trend to catch up with the rest of Europe, and post 1997 this has been able to continue even as employment rises.

13In terms of levels what we observe is that the UK has high levels of GDP per head and high productivity per worker per year but still lags in hourly productivity.

14The gap has been reducing since 1990 – but not significantly faster since 1997. However the fact that productivity has continued to been improved while employment rises is impressive

International Comparisons of Productivity - New 2004 estimates4

International Comparisons of Productivity - New 2004 estimates4

International Comparisons of Productivity 5 (GDP per worker UK =100)

Year

France

Germany

Japan

USA

G7 exc. UK 

1990

131

107

137

1991

132

115

107

138

126

1992

130

115

104

137

124

1993

126

111

100

133

121

1994

124

111

97

131

119

1995

123

111

97

130

119

1996

122

110

98

129

118

1997

121

107

95

128

116

1998

121

105

93

128

116

1999

120

105

92

131

117

2000

118

104

92

128

115

2001

117

102

91

125

113

2002

112

99

88

122

109

2003

110

99

88

122

109

2004

111

97

89

124

110

  • 6  Source OECD Economic Survey of the UK Oct 2005

15Meanwhile the OECD Survey of the UK Economy (Oct 2005) worries about skill levels6.

“Impressive macroeconomic stability but structural performance can be further improved”

“Impressive macroeconomic stability but structural performance can be further improved”

Source : OECD.

The short term future

16On 2005 the European Commission judged UK 3.2 % deficit technically excessive but total debt is only about 40 % of GDP and so there is no immediate cause for concern. Unlike Eurozone countries, the UK not legally bound to follow Commission advice.

17In fact the Chancellor redefined the start point of the “business cycle” so he has not broken his own rules, receiving some derision, including that from Bank of England Governor Mervyn King. Growth forecasts were revised down but would not mean any automatic anti-Keynesian policies as in EMU. The OECD says :

“Clearly, the new fiscal framework has been helpful in restoring credibility to fiscal policy and the economic consequences of slightly missing the golden rule over the current cycle should be regarded as negligible, particularly in the context of relatively low net government debt.”7

18It adds that if the “golden rule” is to be met, then tax rates would have to be raised though Gordon Brown thinks automatic revenue growth (“fiscal drag”) will be enough.

The Euro ?

19The Euro decision has been complicated by relative economic success of the UK in the sense that the UK’s performance is on many measures – especially those used by the government -better than the Eurozone, and the difference between the UK’s performance and that of its neighbours is certainly better.

20In 2003 Gordon Brown’s team actual reached a verdict in Euro entry of “yes, but only if”. 8That is to say the 2003 judgement if read carefully concluded that joining the Euro could bring major benefits to the UK in terms of trade and growth, but only if the system of macro-economic management implied by entry to the Eurozone could be changed. The Treasury economists concluded that the policy instruments the UK would lose on entry to EMU were actually making substantial positive contributions to economic stability and should not be sacrificed unless some replacement instruments could be found. In contrast to opinion in France the Treasury believes that the floating exchange rate has actually been a source of stability.

21UN Treasury does not feel it is put in straight jacket by financial markets. It has the freedom of manoeuvre that Dominique Strauss-Khan wanted to regain in France by joining the Euro.

22The Treasury believes additional freedom of manoeuvre left to UK staying outside Eurozone is beneficial. Macro-economic simulation studies suggest that if UK accepts the loss of interest flexibility, exchange rate flexibility, and has to abide by the Stability Pact rules, then even if ECB stabilising Eurozone as best it could, this would destabilise the UK economy, so additional policy instruments would be needed – which are currently not available.

23So the UK performance is probably better and it would be hard to justify a claim that we could have done better in Eurozone. But the Five economic tests are ultimately a cover for political economic judgement about whose skills at managing the economy would be most effective over the next 25 years. Judgement cannot just be made by models : how can you compare next 25 years in vs out :

  • will the next 20 years be like last 10 or last 40 ?

  • will the UK be hit by external shocks ?

  • can policy be as successful in the future as in the last 10 years ?

Socio-economic policies

24The Blair-Brown policy is designed to create “incentive compatible” welfare state affordable within perceived limitations on willingness to pay taxes by targeting payments and creating incentives to go to work. A key policy has been the Working Family Tax Credit, and financial incentives to get people off sickness benefit (much abused in past a as a way to reduce unemployment totals). The aims have been to lower unemployment, child poverty and use incentives to reform NHS etc, so create a “virtuous circle” of lower unemployment spending and less need to tax.

25Public spending rose post 2000 after 2 years of matching Tory spending, but financial markets and public opinion were prepared for this. The current criticisms of Brown’s policies are that since 1999/2000 he has increased public spending on social policy too much to be sustainable. There is debate about how much restraint will be needed after 2007 but little dispute that the government has profited from its early years of prudence to be able to focus on social priorities.

How successful have they been ? The results of social policy

26The most striking sign of success is the fall in unemployment. Unemployment has fallen, employment risen and above all youth unemployment is lower than in most of EU.

27The social impact of this has been significant. But economists distinguish carefully, between poverty and inequality. The Government quite successful on poverty, less concerned about inequality, though trend towards greater inequality slowed. Key targeted categories of people have done better : Poor working families have not been targeted and have mainly benefited from rising demand for workers

Unemployment by sex (United Kingdom), millions

Unemployment by sex (United Kingdom), millions

Source : Social Trends 2005
http://www.statistics.gov.uk/​statbase/​Product.asp ?vlnk =5748&More =N

Proportion of people whose income is below various fractions of median income ( %)

Proportion of people whose income is below various fractions of median income ( %)

Source Social Trends 2005
http://www.statistics.gov.uk/​statbase/​Product.asp ?vlnk =5748&More =N

28The government claims to be trying to make links between all aspects of its policies, hence the priority given to an expansion of nursery places to allow women to go back to work.

Source “Helping Families” Mike Brewer, Claire Crawford & Lorraine Dearden, Election Briefing 2005,No 7 Institute of Fiscal Studies.

29On the whole social commentators have given the government’s policies a favourable reception and in the next section of this review we will essentially quote a series of judgements made by think tanks pre-occupied worth social policy.

30A study for the Joseph Rowntree Foundation concluded in 2005 :

“The Government has taken poverty and social exclusion very seriously, marking a clear distinction from recent previous administrations. A wide range of the problems faced by Britain in the mid-1990s has been recognised, as has their multi-faceted and inter-linked nature.

- Poverty and social exclusion have been the subject of some of the Government’s most high-profile targets, particularly to cut and eventually “eradicate” child poverty, and to ensure that, within 10-20 years, no one is seriously disadvantaged by where they live.

- However, there are no targets for working-age poverty, for poverty of the population as a whole, or for overall inequality. There are vulnerable groups not covered by specific initiatives ; and in the case of asylum seekers, government policy has increased exclusion (in the terms applied to other groups).

- Where initiatives have been specifically evaluated the effects have mostly been positive, although not always very large.

- Child poverty has been reduced by the Labour Government’s tax and benefit reforms, and detailed analysis of family spending patterns suggests that the income changes for parents with children are having clear benefits.

  • 9  “Policies towards poverty, inequality and exclusion since 1997”
    Centre for Analysis of Social Exclu (...)

“There are substantial differences between the policies pursued in the years since 1997 and those pursued previously. In some of the most important areas, the tide has turned and policy has contributed to turning that tide. This is no mean achievement. However, it does not follow that policy has already succeeded, or that Britain has yet become a more equal society. In some respects it has, but in virtually all of the areas discussed, there is still a very long way to go to reach an unambiguous picture of success. Sustained and imaginative effort will be needed to make further progress and to reach groups not touched by policy so far.”9

31The Institute of Public Policy research argues that the combination of flexible labour markets and support for poorer families means that one has to characterise a new form of “model” In a price entitled “For 'Liberal' now read 'Anglo-Social'” Nick Pearce, Director IPPR wrote in 2005 :

“This emergent new 'Anglo-Social' model secures high employment in flexible labour markets, with open and competitive product and service markets, and mixes these US-style features with strong public services funded through general taxation and a Scandinavian-style active welfare state. These are strong foundations upon which to build a fairer society. And they mean that Britain is potentially better placed to achieve social justice than its critics allow, while countries like France and Germany are increasingly under strain.

But Britain still suffers steep inequalities in income, wealth and wellbeing. Who your parents and where you were born still make too much difference to your chances in life.”10

32Mike Dixon & Howard Reed of the Institute of Public Policy Research summarised the new policies :

“Since 1997, four fundamental policy shifts stand out. First, and perhaps the most important, there has been a focus on “active” labour-market policies which aim to help people back into employment. Second, tax credits have helped to “make work pay” at the same time as increases in support for families with children – both in work and out of work – have reduced child poverty. Some aspects of the labour market have been re-regulated through policies like the minimum wage and new parental rights. Third, spending on public services has been increased dramatically, perhaps the defining feature of the last parliament. Fourth, the child trust fund has been introduced – a small but potentially important break from the means-tested approach.

“Put together, these four shifts mean that Britain has moved away from the US in some important ways. The evolution of the last eight years has seen a new “Anglo-social” model beginning to emerge, with a mix of high employment, economic dynamism, public services funded through general taxation and an active welfare state. These are strong foundations upon which to build a fairer society.”11

33A “Work Audit” study by the Chartered Institute of Personnel and Development argued that the flexibility element had not been to the detriment of workers, its key finding being :

  • The UK lies third in the average pay league behind Luxembourg and Germany – well ahead of countries like France, Italy and the Scandinavian countries.

  • The UK employment rate among those of working age is almost 75 %, which compares with the EU average of 63 %.

  • Around 70 % of British women of working age are in work, as compared with fewer than 60 % in the EU as a whole.

  • Youth unemployment stands at 11 % in the UK, which compares with the EU15 average rate of 16 %.

  • Only 6 % of the UK working population are classed as 'working poor' compared with 10 % in Italy and 8 % in France and Spain.

  • UK full-time workers do 44 hours a week compared with an EU average of 40. Yet the UK also has a far higher share of part-time workers and the average working week for UK part-time workers (19 hours) is lower than the average for the EU (20).”12

Dissenting voices

34Interestingly one of the sharpest notes of dissent comes form the conservative think-tank Civitas which argues that the nature of targeted assistance had overlooked the children of two parent families in employment. Rebecca O’Neill in a piece entitled “Blair government causes child poverty” argued as follows :

“The UK tax credit system favours children who live with a lone parent rather than with both parents. This results in the perverse situation in which a child, both of whose parents work full-time at minimum wage, experiences a higher standard of living if he or she lives with one parent rather than both. In the case of unemployed couples, British mothers would experience a substantial increase in their standard of living after breaking up. These outcomes point to fundamental differences between the welfare regimes of Germany, France and Britain. Taxes and social security payments are much higher in France and Germany, but benefits are distributed more evenly across the social spectrum and the link between contributing and receiving is much stronger. In contrast, redistribution in the UK is much more narrowly directed at low wage-earners and especially non-working or low wage-earning lone parents.”13

35Here we see the significance of the targeting.

36A further controversial aspect of the expansion of public investment spending in the social policy area has been reliance on “Private Finance Initiatives”.

37Essentially instead of the state borrowing for investment, a private firm is given a contract to build a road or a school or a hospital. It borrows the money and the state pays the firm an annual fee to cover the interest and capital charges and in some cases the operating costs with the firm actually running the facility. There are two justifications for this : there private sector may be more efficient at running project, but also the borrowing does not show up as a government liability, a very crude form of market signalling in line with the credibility notion of Balls. Andrew Dinlot of IFS comments :

“Perhaps the Chancellor is keen on this simply because he believes the private sector will really be more efficient by enough to pay for their higher cost of borrowing. But I suspect that he is attracted to PFI because this borrowing doesn't appear on the public sector balance sheets. Just like the £21bn owed by National Rail is not registered as part of the National Debt.”

38The Association of Chartered Certified Accountants conclude however that there are no real cost savings to compensate for the fact that the private sector actually has a higher cost of borrowing : “The message from these calculations is that there is no significant difference between the costs of PFI and conventionally funded options.”14

Conclusions

39Successful Macro economic policy has undoubtedly given scope to the government to prioritise poverty reduction, above all via the promotion of employment and selective targeting of particularly disadvantaged groups. “Prudence” was not just used to cut taxes and squeeze state spending but to foster social priorities. Andrew Dilnot concludes :

  • 15  Observer Nov 6th 2005

“ if Brown deserves to be remembered for the independence of the Bank [of England], he also deserves recognition for the huge increase in the incomes of the poorest pensioners seen under his Chancellorship, as well as his efforts to help low-income families with children. The increases in levels of transfer to these groups mark in my view the largest boost in the incomes of those in need we have seen since 1948.”15

40Polly Toynbee and David Walker in the Guardian agree :

“From the thickets of tax and- benefit details emerged a chancellor intent on making poor people better off, as well as the rest of us. New Labour's second term was a growth era. In the 1990s, the UK economy had grown by 1.7 % a year ; in Labour's new century, it was 2.7 %. Whatever else Blair's Britain did, it worked. From 2001 to 2005, some 1.5m jobs were created ; a million or so disappeared. The net result was near-full employment, even in the most deprived parts of the UK, with unemployment at a historic low……………..

“The overall answer was that, at best, Labour stopped inequality in the UK getting worse. Under pressure from global economic forces, that was something. Its programme of benefits and credits was egalitarian and redistributive, but served only, as the independent Institute of Fiscal Studies put it, "just about to halt" growing inequality, not to cut it.” 16

41But Andrew Dilnot also argues that the financial constraints are soon going to bite :

  • 17  Observer Nov 6th 2005

“As borrowing has risen, much more rapidly than forecast by the Treasury, the credibility of the rules imposed by the new regime has come under pressure. Brown is now close to breaching his promise 'only to borrow to invest'.”17

42Gordon Brown has in the past always been able to argue that his critics have been disproved by events. We can only hope so. There is no doubt that this Labour government has had the most progressive social policies since the 1950s. It has managed to reverse the rise in poverty and slow the rise in inequality by a mixture of cautious macro-economic financial controls, and detailed micro-economic targeting of certain groups and complex incentives. Even if the incentive systems have sometimes come unstuck, the motives have been genuinely progressive, and balance must be judged broadly positive so far. But it remains to be seen whether the fears of a financial crunch ahead will cause a crisis that sets the entire enterprise back or even limits further progress.

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Notes

1  OECD Survey of the UK Economy Oct. 2005

2  Social Policy New model welfare; Nick Pearce and Mike Dixon Prospect - 19 April 2005 http://www.ippr.org.uk/articles/archive.asp?id=1440&fID=55

3  Balls, E. -“Open Macroeconomics in an Open Economy” Scottish Economic Society/Royal Bank of Scotland Annual Lecture, 1997 www.hm-treasury.gov.uk/media/ B46/EF/Ed_Balls_macroeconomics_lecture.pdf

4 http://www.statistics.gov.uk/cci/nugget.asp ?id =160

5 http://www.statistics.gov.uk/cci/nugget.asp ?id =160

6  Source OECD Economic Survey of the UK Oct 2005

7  http://www.oecd.org/dataoecd/18/34/35473312.pdf

8  http://www.hmtreasury.gov.uk/documents/the_euro/assessment/studies/euro_assess03_studcornwall.cfm

9  “Policies towards poverty, inequality and exclusion since 1997”
Centre for Analysis of Social Exclusion at LSE for Joseph Rowntree Foundation http://www.jrf.org.uk/knowledge/findings/search.asp ?type =keyword&keyword1 =government+central&keyword2 =poverty %2Fdeprivation&docyear =1994&docyear2 =2005&category =All

10 http://www.ippr.org.uk/articles/archive.asp ?id =1719&fID =55

11 http://www.opendemocracy.net/democracy-europefuture/society_2705.jsp

12 Work Audit Chartered Institute of Personnel and Development CIPD, 21 Jun 2005, http://www.cipd.co.uk/press/PressRelease/pr2_210605.htm

13 www.civitas.org.uk

14 http://www.acca.co.uk/publications/hsr/45/106799

15  Observer Nov 6th 2005

16  http://politics.guardian.co.uk/bookshelf/story/0,9061,1402165,00.html

17  Observer Nov 6th 2005

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Table des illustrations

Titre International Comparisons of Productivity - New 2004 estimates4
URL http://osb.revues.org/docannexe/image/565/img-1.png
Fichier image/png, 98k
Titre “Impressive macroeconomic stability but structural performance can be further improved”
Crédits Source : OECD.
URL http://osb.revues.org/docannexe/image/565/img-2.png
Fichier image/png, 490k
Titre Unemployment by sex (United Kingdom), millions
Crédits Source : Social Trends 2005http://www.statistics.gov.uk/​statbase/​Product.asp ?vlnk =5748&More =N
URL http://osb.revues.org/docannexe/image/565/img-3.png
Fichier image/png, 227k
Titre Proportion of people whose income is below various fractions of median income ( %)
Crédits Source Social Trends 2005http://www.statistics.gov.uk/​statbase/​Product.asp ?vlnk =5748&More =N
URL http://osb.revues.org/docannexe/image/565/img-4.png
Fichier image/png, 230k
Crédits Source “Helping Families” Mike Brewer, Claire Crawford & Lorraine Dearden, Election Briefing 2005,No 7 Institute of Fiscal Studies.
URL http://osb.revues.org/docannexe/image/565/img-5.png
Fichier image/png, 244k
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Pour citer cet article

Référence papier

Peter Holmes, « Economic policy in the UK », Observatoire de la société britannique, 1 | 2006, 219-234.

Référence électronique

Peter Holmes, « Economic policy in the UK », Observatoire de la société britannique [En ligne], 1 | 2006, mis en ligne le 01 février 2011, consulté le 22 juin 2017. URL : http://osb.revues.org/565 ; DOI : 10.4000/osb.565

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Auteur

Peter Holmes

Reader à l'université du Sussex, où il enseigne l'économie

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Observatoire de la société britannique

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