Kate Barker is a former member of the Bank of England’s Monetary Policy Committee. Kerry worked with Kate on a Mortgage Rescue Scheme that they presented to the then Governor of the Bank of England, Eddie George. A renowned and respected economist, she explains how the coalition has got the response to the economic crisis wrong.
Under Labour there was a long economic upswing from 1997 to 2007. This came to an abrupt end in 2007 with the global financial crisis which had a major impact on the UK’s public finances, such that in 2009/10 the public deficit was more than 10% of our annual output and public debt was rising rapidly. Over and over, the coalition government repeats the charge that Labour left an economic mess which they have to clear up.
But this is a very superficial reading of past events. To quote the Office for Budget Responsibility ‘… it is hard to argue that the tax and spending policies implemented in the early and mid-2000s were in themselves an important cause of the crisis …’. While ahead of the crisis it was argued that Labour’s spending plans were based on over-optimistic economic assumptions, the extent of this error was pretty small compared to the large cost imposed by the financial crisis. These costs resulted from a crisis whose causes were largely outside the UK – it is true that closer regulation of our banks would have protected us better – but the Conservatives certainly were not suggesting this in the mid-2000s.
Post-crisis, Labour reduced VAT temporarily and brought forward capital spending. These policies, together with the cuts in interest rates, produced a move into economic recovery in 2010.
The coalition reversed this fiscal support with a sharp move into austerity. Many economists think that, although it is important to retain the confidence of financial markets, it would have been better to seek to bring the public finances back to balance over a longer period. This would have supported growth in the short-term and reduced the costs of recession. Re-election of the present government would mean repetition of this misguided focus on rapid deficit reduction.