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Labour 'didn't Overspend' Before Crash, Says Prof

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Of course they didn't...

http://blogs.telegraph.co.uk/finance/jeremywarner/100024894/oh-boy-there-was-nothing-wrong-with-fiscal-policy-under-labour-says-top-economics-prof/?placement=mid2

link to blog: http://mainlymacro.blogspot.ca/2013/06/must-we-live-with-post-truth-media.html

Simon Wren-Lewis, professor of economics at Merton College, Oxford, blogs to the effect that there was no real problem of overspending under the last government; the idea that there was is largely a media lie propagated by people such as yours truly, he suggests, though obviously he doesn't get down, dirty and quite as directly personal as that.

There's quite a bit of this sort of revisionism around at the moment – which is odd, given that the Labour leadership has just gone the other way and come over all fiscally responsible. Normally I wouldn't bother with it; this is now basically just one for the history books. Yet if misguided analysis such as this gains traction, failure to control the public finances will happen again, and Britain will for ever be stuck on a treadmill of repeated fiscal crisis.

Labour has been attempting to reposition itself of late as a party that can be trusted on spending. Even so, the leadership continues to deny there was anything fundamentally wrong with fiscal management under the last government, beyond failure to appreciate the threat posed to the public finances by the banking system.

So for these reasons alone it's worth taking issue with Prof Wren-Lewis's analysis. His starting point is that until the financial crisis, Gordon Brown stayed within his own fiscal rules, and indeed was particularly successful in reducing overall levels of government indebtedness to below the 40 per cent (of GDP) threshold he had set himself.

By the way, the really weird thing about Wren-Lewis's analysis is that in an earlier post, he seems to accept that fiscal policy was way too loose towards the end of Mr Brown's tenure. Indeed, he had put his finger on the nub of the delusion that took place – Mr Brown began to believe that higher than expected tax receipts represented a structural and permanent shift in the tax base. He could therefore spend accordingly.

In any case, during Labour's first term of office, Mr Brown essentially behaved himself by sticking to the broad outline of the fiscal consolidation plan begun under the previous Tory government. He called his strategy "prudence with a purpose", for he wanted to earn the right to spend. But then in Labour's second term, there was a return to old habits, and the purse strings were loosened. This was particularly evident in health spending, but in the end it was very broadly based. With disposable incomes and government popularity already under pressure by that stage, Labour basically ended up going for broke and buying itself a third election victory.

It's true that Mr Brown stayed within his own rules, but only by manipulating them to destruction. The golden rule, which required that over the cycle the government could only borrow to invest and not to fund current spending, was by the end a meaningless laughing stock. Some current spending became redefined as capital investment so as to escape the rule, and worse, the Treasury kept redefining where the cycle ended, thus allowing persistent budget deficits at a time of near boom economic conditions.

Admittedly, these deficits were not of themselves off the scale – in the six years running up to the crisis, public sector net borrowing was £26m, £33.3bn, £41.1bn, £37.9bn, £33.1bn and £36.7bn – but cumulatively, they amounted to a big number, and were in any case flattered by what even at the time looked like the wholly unsustainable tax revenues being generated by the credit boom.

Prof Wren-Lewis ignores all this in his most recent post and instead hides behind the obvious, but not terribly helpful argument that the public finances are bound to deteriorate badly in a recession. Yes indeed, but why did Britain's fiscal position collapse quite so precipitously? Why did the UK suffer a worse deterioration than almost anywhere else other than Greece and Ireland. Subsequent "backcasts" by the IMF found Britain to have a structural deficit heading into the crisis of perhaps as high as 5 per cent at a time when it should have been running a substantial surplus.

Professor Wren-Lewis knows about all this, and indeed wrote about it at some length in a recent paper. But he still refuses to accept that the public finances were mismanaged. Just how much more evidence do you need?

Professor Wren-Lewis's wider point is a perhaps more subtle one – that the fiscal framework introduced by Labour was better than what had gone before and what was being done elsewhere.

All the same, it didn't prevent the worse ever peacetime collapse in the state of the public finances. In any case, what really gets my goat about the Wren-Lewis blog is the arrogant suggestion that only qualified academics are capable of speaking the truth on matters such as these. Us media types are meanwhile accused of peddling a political myth on the current Government's behalf. Here's a taste.

So the idea that the last Labour government seriously mismanaged the nation’s finances is a myth. What is more, unlike older myths like the earth is flat, as these charts show, it is not something that is generated by perception and which requires expertise to unravel. Unless you are completely naive about the impact of recessions on deficits, a quick look at the data tells the true story. So it is a manufactured myth that distorts what the numbers appear to show. The problem with myths is that after a time, even otherwise good journalists at good places like the Financial Times start believing them.

You can see where he is coming from. The charitable view of what happened under the last Government is, as I say, that it simply misread the boom in tax revenues. The less charitable one is that it was trying to create a client state that would reinforce its chances of re-election.

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in the six years running up to the crisis, public sector net borrowing was £26m, £33.3bn, £41.1bn, £37.9bn, £33.1bn and £36.7bn – but cumulatively, they amounted to a big number, and were in any case flattered by what even at the time looked like the wholly unsustainable tax revenues being generated by the credit boom.

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From the telegraph quote.

...............You can see where he is coming from. The charitable view of what happened under the last Government is, as I say, that it simply misread the boom in tax revenues. The less charitable one is that it was trying to create a client state that would reinforce its chances of re-election.

Surely, that'll never happen again, will it? Not counting Osborne's Help To Buy Scheme of course.

Doing it in boom times offers up all manner of possibilities for problems. Doing it during a recession is wanton stupidity.

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What about all the other scams brown pulled

Future loaded PFI

Delay in all major infrastructure spend. Power supply being the most critical ....Military equipment etc

Future benefit and public pension commitment incontinence

Blowing windfall incomes ...eg 3g auction.. £22 bn

Allowing runaway personal debit

Probably a shitload more. , but I've not had breakfast yet....

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So for these reasons alone it's worth taking issue with Prof Wren-Lewis's analysis. His starting point is that until the financial crisis, Gordon Brown stayed within his own fiscal rules, and indeed was particularly successful in reducing overall levels of government indebtedness to below the 40 per cent (of GDP) threshold he had set himself.

Prof Moron then?

Brown kept within the spending rules because of the off-balance sheet manoeuvres he was pulling.

http://www.spectator.co.uk/features/2088001/the-great-debt-deceit-how-gordon-brown-cooked-the-nations-books/

As the conversation turned to the inevitable Labour victory, Mr Robinson said how much he was looking forward to turning the government spending tap on again, putting an end to what he saw as the years of Tory parsimony. Mr Davis was bewildered. ‘You can’t do that,’ he replied. ‘You’ve promised to keep within our spending plans.’ The future Paymaster-General smiled broadly. ‘We’re going to do it as capital,’ he said. ‘And then put it on as PFI.’

Davis was understandably baffled. The Private Finance Initiative (PFI) was a controversial, but little-used mechanism established by Norman Lamont to privatise specific construction projects. But it meant something much more to New Labour. Officially, the scheme could be a beacon for the Third Way: a means of injecting the ethos of the private sector into the sluggish public sector, and an opportunity to get projects completed quickly and efficiently. Unofficially — and this is what Mr Brown grasped from the off, and what Mr Robinson was hinting at — PFI was an incredibly convenient way of concealing the true extent of public debt. Rather than pay upfront, the government promised to make fixed payments in each project over a period of about 30 years — keeping the whole thing off the books. PFI was a wizard’s cloak of invisibility which could be thrown around expensive new projects.

..

Since Labour came to power, the national debt has risen 25 per cent to £581 billion. During the second it took you to read that last sentence, it rose by £1,520 — and that’s by the government’s more optimistic measure. This figure does not include the layers of hidden debt, or the various IOUs made out in convoluted ways on behalf of the unsuspecting British taxpayer.

Add up all the money pledged through PFI, and the independent Institute for Fiscal Studies believes that you will quickly reach the sum of £110 billion. The institute’s findings suggest that, were this PFI lump-sum added to officially acknowledged government debt, the total figure would represent 45 per cent of gross domestic product — making a mockery of Mr Brown’s ‘sustainable investment’ rule, by which government debt is not meant to exceed 40 per cent of GDP. If this seems no more than a statistical abstraction, think of it this way: the overall national debt works out as £26,100 for every British household.

And all done during a boom.... Still it didn't overspend in the boom it only appears that way in the bust....

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Simple question for the prof - Was there a deficit?

As long as the deficit (as a %) is smaller than the nominal growth of the economy (as a %) there shouldn't be a problem.

Up until the financial crisis, total UK debt was at very low levels compared with other big industrialized countries.

Interestingly, one thing that Mr Osbourne could do to reduce the deficit with no pain to the electorate would be to nationalize PFI contracts - basically stick the debt on the government books instead of paying sky-high interest rates. Strange he hasn't done that.

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Respond with this when you hear this crap

They encouraged the rest of the economy to borrow and massively overspend. Labour then spent all the resulting tax proceeds.

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What about all the other scams brown pulled

Future loaded PFI

Delay in all major infrastructure spend. Power supply being the most critical ....Military equipment etc

Future benefit and public pension commitment incontinence

Blowing windfall incomes ...eg 3g auction.. £22 bn

Allowing runaway personal debit

Probably a shitload more. , but I've not had breakfast yet....

Obviously this.

Off balance sheet spending and borrowing...doesnt show in the deficit, but sure as hell shows in the GDP.

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Respond with this when you hear this crap

They encouraged the rest of the economy to borrow and massively overspend. Labour then spent all the resulting tax proceeds.

Not only spending the tax take from phoney rise in GDP but locking in the spending for the future with enormous health and welfare commitments. We now appear stuck with a deficit that we can't shift.

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He's clearly been ...encouraged to write this. Tripe.

Let's see if he gets a peerage in a few years time. Or "increase in funding" when Labour gets in.

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As long as the deficit (as a %) is smaller than the nominal growth of the economy (as a %) there shouldn't be a problem.

Up until the financial crisis, total UK debt was at very low levels compared with other big industrialized countries.

Interestingly, one thing that Mr Osbourne could do to reduce the deficit with no pain to the electorate would be to nationalize PFI contracts - basically stick the debt on the government books instead of paying sky-high interest rates. Strange he hasn't done that.

Pumping GDP via imputed rents, which have accounted fir £40Bn of nominal GDP growth since 2007, around a quarter of all GDP growth since then, does not make debts eadier to manage despite it making the debt/GDP stat look healthier.

By this fiddle, Osborne has allowed himself to stick tens of billions of unfunded spending onto the national debt without raising the ratio, yet this extra borrowing is backed with precisely nothing of substance for repayment purposes.

Edited by cheeznbreed

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Academic economist berates economic journalism! How many of their joint number identified the Crash before it happened? It's like two bald men fighting over the use of a comb.

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Pumping GDP via imputed rents, which have accounted fir £40Bn of nominal GDP growth since 2007, around a quarter of all GDP growth since then, does not make debts eadier to manage despite it making the debt/GDP stat look healthier.

By this fiddle, Osborne has allowed himself to stick tens of billions of unfunded spending onto the national debt without raising the ratio, yet this extra borrowing is backed with precisely nothing of substance for repayment purposes.

I should imagine imputed rent is a double count...as the money so "earned" is spent in the wider economy.

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Not only did Labour overspend in the latter years but Labour failed to recognise and do anything about the weaknesses and failures developing in the economy even though they were becoming clearer and clearer with every passing day.

For example the irresponsible lending encouraged to inflate the housing market above any level of normality which eventually was a main contributor to the economic collapse. The acceptance of inflation continually above the level specified in its own written remit.

The Professor's attempted analysis doesn't seem to consider that sort of detail at all or whether the general economy was healthy and balanced enough in the first place to sustain all the debt and extra taxation etc being loaded onto it. It clearly wasn't.

The levels of debt and taxation were too high for a healthy economy never mind one already on its last legs.

In the latter years Labour went on such a spending spree that in 2007 they were having to scrape the barrel by doing away with the10% tax band which had helped those on a low income and pensioners. Those people were only partially and reluctantly compensated for the loss of that tax band by protests within the Labour party.

Then the scorched earth profligate policy to try to win the 2010 general election was something else to behold with, for example, thousands upon thousands of non-jobs in the public sector being offered all over the place as vote winners.

Of course the other lots didn't put up much opposition to the gravy train and indeed they're even now following their very own scorched earth policies on top of Labour's scorched earth policies in the run-up to the next general election likely in 2015 with the crazy Help to Buy scheme and suchlike.

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Not only did Labour overspend in the latter years but Labour failed to recognise and do anything about the weaknesses and failures developing in the economy even though they were becoming clearer and clearer with every passing day.

For example the irresponsible lending encouraged to inflate the housing market above any level of normality which eventually was a main contributor to the economic collapse. The acceptance of inflation continually above the level specified in its own written remit.

The Professor's attempted analysis doesn't seem to consider that sort of detail at all or whether the general economy was healthy and balanced enough in the first place to sustain all the debt and extra taxation etc being loaded onto it. It clearly wasn't.

The levels of debt and taxation were too high for a healthy economy never mind one already on its last legs.

In the latter years Labour went on such a spending spree that in 2007 they were having to scrape the barrel by doing away with the10% tax band which had helped those on a low income and pensioners. Those people were only partially and reluctantly compensated for the loss of that tax band by protests within the Labour party.

Then the scorched earth profligate policy to try to win the 2010 general election was something else to behold with, for example, thousands upon thousands of non-jobs in the public sector being offered all over the place as vote winners.

Of course the other lots didn't put up much opposition to the gravy train and indeed they're even now following their very own scorched earth policies on top of Labour's scorched earth policies in the run-up to the next general election likely in 2015 with the crazy Help to Buy scheme and suchlike.

Labour were appalling in the way they deregulated the City and allowed a housing bubble to let rip. PFI was and remains a disaster for the tax payer. High end public sector salaries are out of whack and in serious need of a proper national pay scale (if you want the big bucks start your own company).

There was also the relaxed attitude towards corporate tax avoidance to the extent of doing 'deals' even when there was a watertight legal case for the full amount (cf Vodaphone..)

Oh, and mass immigration without bothering to ask the general public first.

But actual overspending was not that big a problem compared to these.

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in the six years running up to the crisis, public sector net borrowing was £26m, £33.3bn, £41.1bn, £37.9bn, £33.1bn and £36.7bn – but cumulatively, they amounted to a big number, and were in any case flattered by what even at the time looked like the wholly unsustainable tax revenues being generated by the credit boom.

Thanks, saved me time. I was going to quote that too, and even the professor admits it, here:

Of course you could say that the Great Recession was the government’s fault. It should have foreseen the financial crisis coming. It should have known that levels of GDP in 2007 were going to be interpreted, five years later, as a massive economic boom rather than as they appeared at the time as something close to trend. It should have known this, despite the advice it was getting to the contrary from the Bank of England, the IMF, OECD, most economists …. and Her Majesty’s opposition! You can take that idealist view - but not if you were agreeing with all this advice at the time.

Morons, all of them.

.

Edited by Tired of Waiting

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As long as the deficit (as a %) is smaller than the nominal growth of the economy (as a %) there shouldn't be a problem.

Not if you're running a 4% budget deficit at the peak of a boom becuase, as we've seen, once things go pop that deficit can quickly spiral out of control.

Up until the financial crisis, total UK debt was at very low levels compared with other big industrialized countries.

The state of the public finances is determined by decisions made 5, 10 or more years previously. Things looked ok up until the mid 2000s due to the work done by Clark up to 1997 and The Cretin Brown's decision to follow his spending plans until 2000. What destroyed the public finances was TCB's decision to go on a mad spending spree in the run up to the 2005 election, see the following:

uk-public-spending-total.png

As you can see spending went up from a sensible £350bn p/a in 2000 to over £600bn in 2009, the scale of the disaster was partly hidden by the financial bubble but even then he was planning to run a deficit of something like 5% of GDP at the peak of the bubble - utter madness.

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