Friday, 28 June 2013

The Crisis Wasn't Brown's Fault. The Slow Recovery Is.

Let's be absolutely clear. The near-failure of the financial system on Gordon Brown's watch was not entirely his fault. Thus the rise in the deficit from 3% to 11% of GDP isn't directly Brown's fault. At least not in the short term. But the slow recovery is his fault. And here's why.

It's not just the defict. A 3% deficit once in a while is ok. No Government can balance the books every year. But running a deficit every year for a decade, that's wrong. Running a deficit bigger than growth increases the debt to GDP ratio. This is fine, when the stock of debt is low, but doing so during a "boom" is wrong. And increasing taxes to fund increased spending isn't always wrong either. doing so during a boom is fine in moderation. But increasing  spending, over inflation, and during the biggest rise in peace-time taxation in British history, year, on year, on year (as Brown did) was not just wrong, but insane. It's difficult to over-state how insane Brown's fiscal policy actually was. He raised taxes during a boom, then spent it all but it STILL wasn't enough. So he borrowed more, and more, and more, every year on top of booming tax-receipts to keep illusory growth coming. Gamblers call this approach 'the martingale', and it always results in catastrophic losses, because of house limits. Brown believed there were no house limits. But there are, even for Governments.

The pips were squeaking long before the market blew up. The private sector was over-taxed and barely put on any net new jobs at all over New Labour's tenure. Squeezed by regulations and crushed by rising demands, business stopped hiring. A group of workers, the non-financial private sector, which were not growing, nor were they enjoying increases in living standards under Brown, were being asked to fund a massive increase in the number of, and payment to the public sector. All Brown's "end to Boom and Bust" growth was debt-financed public sector spending. All the net new jobs were courtesy of the Tax-payer. And when those massive tax-receipts from the City which had allowed this to appear OK stopped, the wheel came off.

Brown's regulatory regime failed its first test, but so did every regime, everywhere. The Greenspan put, which I ultimately blame for the crisis was standard political economics everywhere at the time. Doing the standard thing does not make Brown culpable.

The financial crisis may not have been Brown's fault, and his response to it was (I'll grudgingly admit) not too bad. It's not exactly what I would have done, I'd have let the banks fail, secured depositors only (not bond investors) and used helicopter money to bail out PEOPLE not bank. But Brown's approach certainly wasn't wrong, and represented one of the better options on the table. But the fact is Brown appeared to believe he'd ended Boom and Bust beforehand, and left Britain with no fiscal wiggle-room at all. The fact the crisis was as bad as it transpired to have been for this country was absolutely Brown's fault. Financial crises happen. Brown though he'd stopped them for good. That is pure hubris. The Tory charge, that he didn't fix the roof when the sun was shining is actually quite accurate.

Brown overspent when he should have been saving. He rose taxes when a prudent government should have been able to cut them. He left a huge, bloated public sector, the cuts to which are slowing down the recovery.  (That the cuts are slowing growth does not mean we should stop cutting and miraculously get growth, nor would that growth allow the deficit to fall). Thanks to the grotesque tax-hikes of Brown's tenure, there's no scope for further rises to close the gap. In isolation, each of the defences of Brown's fiscal policy hold water. Together, they don't.

Like the Irishman giving directions "Well I wouldn't start from here", should form the Tory critique of Brown's time as Chancellor and PM. We should have been running a 1% surplus in 2007. This means the deficit would have been 7%, not 11% in 2010. We should have been a creditor nation by 2007, having almost entirely paid off the net national debt and been sitting on great piles of T-bills, JGBs and Bunds. Our stock of debt would have gone up, but we'd be rapidly approaching 40% of GDP, not 100%. There would be no need for decades of Austerity. The fiscal fire-power the Government could have deployed to keep the wheels moving would have been much greater.

But counter-factuals are pointless. All that's left, is the long, slow, grinding process of austerity to bring the insane levels of state spending under Brown 2000-2007, back under control. This will take decades. I will be paying more tax, thanks to Gordon Brown, for the rest of my life. For that, I will never forgive him. For cheering him on, I will never forgive Labour.


Anonymous said...

Although I have no love for Jackart, this is an excellent post. Gordon Brown was a lunatic who should be executed for treason. In many ways the current Conservative govt remind me of brown - in fact they are spending even more than he did !


Anonymous said...

Vote UKIP to solve this crisis.

LondonStatto said...

What? Putting Ed Miliband in Downing Street and Ed Balls back in the Treasury will solve the crisis?

Luke said...

I actually agree with quite a lot of this. My only real difference is how much of a difference he made - did he make it a bit worse, or a lot worse.

But a quibble - what's the big problem about a *small* (note "small") deficit even in good times? If you have inflation of 2% (the target) and growth of 2%, and a deficit of 1-2%, you're still reducing debt/GDP.

A bit pedantic, but there does seem to be an idea floating around that "we can't keep borrowing money every year". Well, we can actually - the fact we have done so for a hundred years is a clue. Also an idea that "we have to pay it back one day". Well, not really. We can just roll it over as we have done for 300 years.

None if this is to say that we shouldn't try to reduce debt to GDP most of the time so we have some real firepower when needed - your basic point.

Just that bit less panic about debt might be in order. For the last two years, UK govt could borrow for 30 years for nothing in real terms....and chose to take as little advantage of that as it could. Cf Apple - "You guys want to lend to us for nothing? OK, we'll have $17 billion thank you, never mind that we've got $100bn stashed away...

Jackart said...

I make clear there's no problem with a small deficit over growth. But not during a boom, while you're increasing taxation faster than any peace-time government in History year, on year, on year.

Brown's policy in the whole was INSANE.

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