The claimfactFiction3 Whos deceiving who on the deficit?

“My concern is that a great deceit designed to damage Labour has led to profoundly misguided and dangerous economic decisions that I fear will cause deep damage to Britain’s future. What is this deceit? It is that the deficit was caused by chronic overspending rather than a global financial crisis that resulted in recession and a calamitous collapse in tax revenues.”

Labour Party Leader Ed Miliband, The Times and his website, January 6, 2011

The background

Since becoming prime minister last spring, David Cameron has laid the blame for Britain’s economic mess fairly and squarely at Labour’s door. To listen to him, you’d think the last government was wholly responsible for the state we’re in. Well today Ed Miliband launched a fightback. The country’s annual deficit of £150bn was caused by a worldwide downturn that was beyond the last administration’s control, he retorted. So is he rewriting history or simply setting the record straight?

The analysis

There are two well entrenched sides on this debate – but FactCheck will try to cut through the partisan economic gobbledegook. To get a clear understanding of who’s deceiving who, we need to separate out the two factors contributing to the deficit: one is Labour’s tax and spending decisions, and the other is the recession.

By 2007 Labour had cut the level of national debt, and was running a lower annual deficit than it inherited when Tony Blair moved into Number 10.

But Britain’s efforts were vastly outstripped by the majority of OECD countries – which arguably left the UK in a worse position, comparatively, to deal with the financial crisis.

And as Guido Fawkes pointed out, government spending was already exceeding revenues by 2002. Before the financial crisis hit, in 2007/08 the government borrowed £33.3 billion, and planned to borrow £43 billion the next year. It was clearly spending more than it could afford. Professor Wickens, from University of York and Cardiff Business School, told FactCheck that if the Labour government had increased taxes in line with spending, we would be in a far better position now.

So, Ed Miliband’s pre-Christmas argument that “our government paid down the debt before the crisis hit” does ring rather hollow. But it’s worth remembering the Tories did sign up to Labour’s spending plan in 2007 – “neither of the two parties now in government called for lower spending at the time” Miliband wrote today.

Let’s move on to the second part of the deficit – the impact of the economic slowdown. There’s no doubt borrowing shot up, to £156 billion in the last financial year. As the IFS pointed out to FactCheck, only the economies of Ireland and Iceland are expected to have seen a larger increase in debt between 2007 and 2010, than the UK.

This morning, Left Foot Forward were quick to point to numbers suggesting that increase was largely due to a reduced tax take, just as benefit spending soared. The Conservatives responded with figures that they say shows the deficit was more to do with spending increases than falling revenues.

In fact, as the 2009 budget shows, what actually happened is that the Treasury’s own projections for the tax take plummeted. They had expected growth in revenue, but in fact they got a collapse. By 2009/10 they were taking in about £112 billion less than they had expected to. And that’s why they needed to borrow so much. Yes, spending went up a bit. But really, they just had a lot less income than they had planned for.

The verdict

Ed Miliband is right to claim that Labour cut some of its debts, but it could have done much more. And if it had, as David Cameron has often said, we would have been better prepared for the economic maelstrom that ensued. That said, the drop in tax receipts triggered by the economic crisis is what’s behind the bulk of the £149bn deficit.

So who can be trusted more to run the economy – Labour or the Tories? If the Conservatives succeed in eliminating the deficit and reviving the economy, Ed Miliband can pen any number of articles in The Times and it will be of little use. However, if the recovery starts to falter again, the Labour leader might once again earn the right to be heard on economic matters.

Read more:

Category: Economy, Ed Miliband, Labour
Tags: , , ,