New Labour was not about making hard choices

I have now finished watching Blair & Brown – the New Labour Revolution, a 5-part series from the BBC on the Labour government of 1997 to 2010. For politicos like me it was compulsive viewing, for all its flaws. Does it say anything to us about politics now?

One criticism of the series is that it was too long. Five episodes of one hour each is indeed a lot of time, but I was hooked, as were many of the reviewers. We learnt quite a few new things, and the tension between its two principal characters gives the subject a fascinating dynamic. In fact the main problem seemed to be on how much it left out. There was no coherent commentary from the left of the party, for example, and the causes of the Global Financial Crisis were not examined. This left two critical parts of the New Labour narrative (or myth in the word’s broader sense simplified story) unchallenged – that “Old Labour” was unelectable, and that the GFC was something that happened from out of the blue from the USA that the government neither contributed to, nor could do much about. Both warrant challenge, even if emotionally I am bought into the first of those myths, while strongly disagreeing with the second. But neither is a simple question to unpick, and the argument on the GFC is probably asking too much for most political journalists to be able to handle, alas. Instead they took a whole episode to dig into the Iraq War – an editorial decision that it is hard to gainsay. The first episode covered the period before they won power, and there was episode for each of the three terms – so there was a logical structure to the whole series. Quite a bit of time was spent on pregnant pauses within the interviews (which included both main protagonists amongst many other important figures), but the overall pace was not slow.

I am struck by how deeply flawed the partnership was. The two leaders worked as a team before the 1997 election, but after that Gordon Brown jealously guarded the Treasury as his fiefdom and kept Tony Blair at arms length. I have no doubt that it was Mr Brown who was primarily at fault here. One of the most remarkable moments came when it dawned on Mr Blair that the government had to dramatically raise its spending on the NHS, to bring it into line with the average of health spending in Europe. This was a brilliant insight (which I have explained recently on one of my blogs) that very few people in the governing elite seem to understand – instead seeing the NHS as a spending black hole that needs to be contained somehow. But the only way Mr Blair could persuade Mr Brown to follow this line was by announcing it in a television interview. Mr Brown could not see the wood for the trees. It turned out to be one of New Labour’s best, and most popular, policies.

It would be tempting to characterise the partnership as Mr Blair being strong on vision, and Mr Brown being good on the detail. But Mr Blair was wrong about a lot of vision things too. He was wrong to push for joining the European currency (though at the time I was on Mr Blair’s side) – another disagreement resolved through the news media; he was wrong about joining the Americans in the Iraq war; he was wrong about trying to bring a private sector ethos into the public services, such as the NHS and schools. On all of these Mr Brown’s judgement seems to have been better, though he was and remains very unengaged on Iraq. But Mr Brown became complacent, especially with his hands-off approach to the financial sector. He put in place a tripartite system for managing national finance, between his Treasury, the Bank of England, and the Financial Services Authority (FSA). All well and good, but it was clearly his job to ensure that the system as a whole was working. He did not seem to grasp the seriousness of the situation until the collapse of Lehman in late 2008, by which time he was Prime Minister. His response then was magnificent – but more insight in 2007, when the risks were becoming obvious, would have helped. Instead he cut the rate of Income Tax, which left the country very vulnerable when the bubble burst. He was so blinkered by his success in “no more boom and bust” that he would not see the risks building up in the system.

Though it ended badly, New Labour has to be seen as a success overall, with three successive Labour general election victories, two of them landslides. Can it tell us anything about the future? The obvious parallel takes us back to Labour, which once again is back in the doldrums. The New Labour strategy was to win by courting the political middle ground and holding back on the party’s more left wing instincts; their most important insight was that the middle ground was a rather conservative place, and not the liberalism associated with centrist political parties, though it needed that too. The party needed a firm message on law and order, and a conservative stance on taxes and spending – as well as keeping union power at bay. This meant accepting that a lot of the legacy of Margaret Thatcher’s government had to stay. That itself was not enough, because John Major’s Conservatives were firmly anchored in that middle ground, and had used that strength to pull off a victory against the odds in 1992. Mr Blair and Mr Brown also had to exude confidence and competence. This was not too hard, as the Tories were beset by divisions, and their economic prestige suffered a fatal blow with the ERM fiasco in 1992, shortly after the election.

Can Labour follow the same strategy? Its leader, Sir Keir Starmer, clearly thought so after he took over in 2020, with the government floundering with its response to the covid-19 pandemic, and seemingly led by right-wing ideologues. Mr Starmer always appeared on television with the word “leadership” on his backdrop. But the Conservative leader, Boris Johnson, has a clear eye on that middle ground, which remains generally conservative. But he also understands that the middle ground has moved on – largely thanks to New Labour. Now it means a strong commitment to state-funded public services, such as the NHS. Unlike Mr Major (now Sir John), though, he has an iron grip on his party. He has recovered from his wobbles on the pandemic, and the public (or the floating voters anyway) appear to have forgiven him. Mr Johnson’s rhetoric on climate change and the environment also marks out his fight for the middle ground. He is not presenting anything like the target that Messrs Blair and Brown were able to destroy prior to 1997.

But the problem for Mr Johnson, and anybody hoping to win on the middle ground, is that it is a have-your-cake-and- eat-it sort of place. It wants well-funded public services but no more taxes; it wants action on climate change but no addition to heating or motoring costs, and so on. This is creating growing tensions within the Conservative Party. It does not create much of a direct opportunity for Labour – who are no more able to solve the contradictions of this middle ground than the Tories. But division amongst the Tories could allow Sir Keir to appear as a more competent alternative.

But a successful challenge is unlikely to look anything like New Labour. Perhaps Labour can try its own “cake” strategy by allying itself with the Lib Dems and the Greens, each of which can cement its appeal to different segments of the anti-Conservative market while leaving there contradictions unresolved. That alliance would need to be based on the promise of electoral reform. It would be a risky strategy, and it is too early to start playing the cards now. New Labour did create an informal alliance with the Lib Dems in the 1990s, as part of its strategy of leaving nothing to chance. But the Lib Dems are weaker now, while trust between the parties is low. Mr Blair was happy to hint at electoral reform then but in the end was “unpersuaded”. Something stronger would be needed now.

Britain, along with most of the rest of the world, is confronting some difficult choices. This is much more the case than in 1990s, when the opportunities for economic growth were much better. After an initial period of austerity, New Labour did not have to navigate such treacherous waters and was able to present voters with a “both/and” proposition. Alas hard choices do not make good politics – the revolution now would be to make taking those choices electorally appealing. The New Labour experience offers us no clue on how to pull off such a feat.

Who is to blame for the UK’s economic mess?

As time passes it is clear that the UK’s economic crisis is amongst the worst of the major developed economies, though Japan may beat it on some measures.  It’s not in the league of some smaller economies, like Ireland or Greece, although a comparison with Portugal may be more nuanced.  Some people (notably Labour politicians) struggle to accept just how bad things are; others don’t get much beyond railing deficits and the National Debt.  It’s worth pausing to consider what went wrong, and to try and attribute responsibility.

What happened?  Until 2007, the UK had an astonishingly consistent record of economic growth.  This started with the departure from the European Exchange Rate Mechanism under John Major in 1992, and continued until early 2008.  Economists had taken an average annual growth rate of 2.5% for granted.  Unemployment fell, and most people felt better off, though the very wealthy did much better than the rest.  Public expenditure rocketed, with massive investment in the NHS in particular.  A recent study by the Institute for Fiscal Studies (IFS) shows that poverty was reduced, largely because of increased benefits and tax credits.

And then bang!  GDP shrank by 6% in a year, stayed flat for the year after that, before struggling to a bit under 2% growth in the year after that (taking the year to the 1st quarter from the ONS).  Forecasts are for consistently anaemic growth. This is striking.  When economies hit a recession due to a temporary shock, they bounce back quite sharply, as temporarily unused capacity comes back on stream; this is what has happened in Germany this time.  Not for us; a good 7% of the economy has vanished never to return.  What makes this particularly bad is that this 7% produced an awful lot of taxes, while public expenditure carried on regardless (with benefits increasing due to the extra unemployment and hardship).  This has left the country with a “structural deficit” of about 8%.  This is the excess of public expenditure over taxes after you strip out temporary factors; the actual deficit was much larger (it reached 11% and has now dropped to 10% per annum).  Now I’m not sure how we ended up with an 8% structural deficit after losing just 7% of GDP, of which presumably no more than half would will have been taxed.  The government was already running a bit of a deficit when disaster struck; I think that capital taxes must account for the difference, now that the property boom has disappeared.

What this comes down to is that a lot of the pre-crisis growth was not for real, and government finances were built on unsustainable foundations.  What was happening?  This phantom growth seems to have been related to a boom in personal borrowing to finance property purchases and good old fashioned consumption.  Symptoms included an over-sized finance industry (in earnings if not jobs) and unsustainable levels of consumption.

Who was to blame?  The three commonly cited answers are everybody-and-nobody/events-beyond-our-control, bankers, or the Labour Government.  Some Labour politicians still seem to subscribe to the first idea.  It was an international storm (I never want to hear the phrase “perfect storm” again) and we were caught in it; nobody was seriously criticising government policy before the crisis.  As the economy has failed to bounce back, this has become unsustainable; why are we having so much difficulty when other countries caught by the crisis are having an easier time?  Of course some try to say this is because of Coalition policies over the last year.  But almost all of the many critics of the Coalition policies accept that we were in a terrible mess in the first place.

So the critics shift to another target: Britain’s bankers.  These are an easy target, paying themselves handsomely while their organisations required government bailouts.  There is also a widespread conception that the bailouts cost a lot of money, and that this is one of the reasons that government debt is a problem.  Actually the government has largely got away with it, for which Gordon Brown and Alistair Darling deserve some credit (contrast the terrible hash that the Irish government has made).  A lot of government money was put at risk, yes, but the banks were charged for it, and the money lent will largely be repaid, and the guarantees not called on.  Where the bankers were culpable was in rampant lending, supporting excessive consumption and a property bubble.  But the lending was nothing like as reckless as in the US (or Ireland for that matter).  If the government had awakened to the idea that consumer lending needed restraint, something could have been done.  Let me be clear; the banks were reckless; we need to regulate them much better – but they were not the fundamental cause of the crisis.  We had a narrow escape.

Could the government have seen the vulnerability of the British economy?  There were not many prominent critics at the time, though Vince Cable was clear enough, for exactly the right reasons.  But it was a matter of undergraduate economics to see that economic policy was on an unsustainable path.  Literally.  As a second year economics undergraduate at UCL in early 2007 my macroeconomics lecturer, Professor Wendy Carlin, used the UK economy as a case study to illustrate her model for an open economy.  It was also used as an exam question.  Was the UK’s strong economic performance due to increasing economic efficiency or excess aggregate demand, she asked.  It was clearly the latter: the giveaways being the appreciating real exchange rate, and a large current account deficit (the economy as a whole consuming more than it was spending).

What should the government have done?  The first thing should have been to raise interest rates and tighten monetary policy much earlier.  Unfortunately this was genuinely difficult, because this was the Bank of England’s main target was inflation, and not the general standing of the monetary system. And the inflation rate seemed benign (thanks in large part to the overvalued pound).  The second thing would have been to regulate the banks harder, to restrain lending.  This was the FSA’s job, although the degree of independence of this agency is less strong.  Finally the government could have tightened fiscal policy to reduce the level of demand in the economy, through expenditure cuts or tax increases.  Nominally the government’s policy was to run a zero structural deficit, but it chose to fiddle with the statistics on the economic cycle so as to argue that it did not have to do anything.  The government was not egregiously profligate, as Coalition politicians like to suggest, but it was pushing the wrong way.

What comes over, above all, is a failure of leadership, especially from Gordon Brown, as a formidably powerful Chancellor of the Exchequer.  The tripartite arrangement for managing the financial system (between Treasury, Bank of England, and FSA) did not help, but it is very clear that if in doubt it was the Treasury’s job to lead.  They didn’t.  They could have leant on the FSA and Bank of England, as well as tightening fiscal policy directly.  But Mr Brown either refused to recognise the gravity of the situation, or his political courage failed him.  Given his constant level of denial about the seriousness of the crisis, I suspect it was mainly the former.  He could not face admitting that so much of economic achievement was unsustainable.  It is invidious to blame one man, when the hands of many were involved.  But Gordon Brown had the authority; there was enough evidence for him to act on; and he made things worse not better.  A career in the Treasury that had started so brilliantly ended catastrophically.

My next topic on the economy: is the Coalition economic policy making matters worse or better?