Trust in Labour on the economy was hard won, deserved, then needlessly lost, suggests Kitty Ussher

The Blair government won office after 18 years in opposition. Unlike its predecessor Labour governments, it was not met by a dip in the stock exchange but instead heralded a decade of continuous growth. The government set to work early, granting the Bank of England independence on day one and setting about a full-frontal attack on low pay in its first weeks. Gordon Brown’s first budget was not only ‘prudence with a purpose’, but was greeted by media traditionally hostile to Labour in unprecedented ways. He created the 10p tax rate in 1999, the national minimum wage took effect in the same year, and soon the Treasury’s flagship policy – tax credits – was in force and helping working people. Combined with strong investment in health and education, Labour’s first decade proved that economic prosperity and social justice could indeed go hand in hand.

However, it is impossible to evaluate Labour’s economic record in office without doing so through the prism of the financial crisis that hit in 2007-9; it was, in a sense, the ending of the story. If Labour was either responsible for the crisis, or failed to take reasonable steps to prevent it, then that is a pretty damning indictment of its time in government against which all else pales into insignificance.

So, it is important to deal with this head on. Did Labour cause the crisis? No: International Monetary Fund data shows that the vast majority of the so-called ‘toxic assets’ that spread around the global financial system originated in the United States. No government of any hue could have prevented it. Did Labour overspend? No: even if Labour had run a surplus in the run-up to the crisis, as opposed to a few years of moderate budget deficits, we would still have a massive pile of debt now, as other comparable countries do. The effect of the financial crisis was a different order of magnitude, blasting through Labour’s fiscal rule of keeping debt under 40 per cent of GDP. But the fact that rule existed meant that the shock of the crisis could be absorbed without needing to call in the IMF, even though the hard task of getting debt levels back down again will take many years to complete.

This is not the same as saying that nothing could have been done differently. British consumers were uniquely exposed to a downturn because they had been borrowing too much before the crisis emerged: in economics-speak, the savings ratio was at a historic low. The government did little to change people’s behaviour in this regard, when perhaps it should have done. Personal debt did not cause the crisis, but it did mean that households had further to go to retrench themselves to a position of financial security once confidence fell, which might explain why the recession in the United Kingdom was a little sharper than elsewhere. Action could perhaps have been taken sooner to curb this expansion in credit: the fact that the Financial Conduct Authority now appears to be pushing at an open door as it seeks to re-regulate the consumer credit market shows how little was done before.

And, of course, if the British regulatory system had subjected its bank and building societies to more rigorous stress-testing prior to the crisis, then more institutions would have had greater resilience when the tidal wave finally came. Nevertheless, when the UK was faced with the very real threat of systemic financial failure, being, on occasion, only a few hours away from the cashpoint machines being unable to give people access to their own money, the Labour government responded robustly and was emulated by the rest of the world. When the going got tough, we stepped up and got the job done.

Although not directly linked to the financial crisis, there was also policy failure in relation to asset price bubbles: then, as now, neither central bank nor government is prepared to intervene directly to prevent ever-rising house prices from distorting consumer behaviour, and so the rest of the economy.

It should also not be forgotten that Labour’s handling of the crisis was not only second to none, but the blueprint followed by much of the international community. Brown led the G20, averted the worst effects of the crash and prevented unemployment exploding above three million – as happened twice under the Tories. Frontloading infrastructure spending not only built new schools but supported a fragile building trade and kept people in work. The return of Peter Mandelson to British politics brought with it a new industrial policy, fresh from his experiences as European trade commissioner, and the car scrappage scheme.

So, now to the pre-crisis world. As I have argued elsewhere, according to objective measures Labour’s economic record is good. The productivity gap with France and Germany, much bemoaned in the early 1990s, narrowed under Labour. Unemployment and inflation were both low and stable. Bank of England independence provided a more reliable economic environment within which firms could grow, creating jobs and opportunity. Some people got very rich but, as the Institute for Fiscal Studies has demonstrated, Labour’s reforms to the tax and benefit system taken together saw the incomes of the poorest 10 per cent of households rise by around 13 per cent whereas the incomes of the richest 10 per cent fell by around nine per cent. This was in stark contrast to the widening of the gap between rich and poor presided over – as a result of policy choices – by the previous government, and many of our neighbours.

Within the world of work significant changes took place, most notably to the system of parental leave where a legal right to flexible working was first introduced and then extended, something I am very proud to have been part of when working with Patricia Hewitt at the then Department of Trade and Industry. Coupled with the introduction of the extended school day, this slowly began the long-overdue modernisation of the traditional nine-to-five day, to the benefit of millions of parents. But there is much more to be done for those on lower wages, where the difficulty of obtaining part-time promotion combined with the impossibility of working longer hours creates insurmountable barriers to raising standards of living among low-income households with children.

Labour also failed to anticipate the rapid rise in self-employment, some of which is a positive attempt by relatively high-skilled people to freelance in search of more control, more income or as an alternative to unemployment. However, for the lower skilled it can make a vulnerable situation worse through lack of pension provision, job security and statutory sick pay. In fact, the motivations of the vast majority of small business owners were never really understood by Labour – small businesses were celebrated as potential future big businesses rather than being simply a perfectly decent way of enabling individuals to earn a living through trade. In its actions, Labour sought to work in partnership with the private sector to achieve social aims, but it lost the political argument to those who were opposed to contracting-out, PFI and the other specific forms that this partnership took; an acceptable price to pay, perhaps, for the massive capital investment that was nevertheless achieved.

But perhaps the greatest success, pre-financial crisis, was Labour’s demonstration that economic credibility was a mantle it could wear. Achieving that took decades of work, before and in government. The fact that, in our post-2010 exhaustion, we were unable to protect it from political attack, means that, despite the successes, the overall story of Labour’s economic record in government is ultimately a tragic one.

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Kitty Ussher is a former Treasury minister and a contributing editor to Progress

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