If there’s one thing that haunts Labour, however much the Tories are determined to commit hara kiri, it is the accusation that ‘Labour was responsible for all this mess in the first place’ by gross over-spending. Since this is not true, why doesn’t Labour refute it at every opportunity? Just before the crash in 2007-8, the UK budget deficit stood at just 3% of GDP, low by contemporary OECD standards and tiny by historic standards. At the end of the Napoleonic wars government debt was over 250% of GDP. Just before World War I it was about 30%, rising to 175% by 1918. It was still 125% at the start of World War 2, by the end of which it stood at 230%. It then fell to no more than 25% by 1990, but since then rose to almost 70% by 2010. Following the banking bail-out it has risen now to just under 90%.
But the budget deficit which peaked at 11.6% in 2010 has been badly aggravated by other factors which are almost never mentioned. It reflects largely the constant current account deficit which has significantly worsened over the last two decades. Till 1985 the UK current account was largely in balance, with an increasing deficit on manufactured goods and transfers abroad being offset by rising surpluses on services and net income. The overall position then deteriorated under Thatcher’s regime at the end of the 1980s, and though this temporarily improved again after Britain left the ERM in 1992, ominously the position deteriorated again by the end of the 1990s. During the 2000s the adverse trend worsened badly and in that decade to 2010 the UK had a huge cumulative payments deficit of £287bn.
Since then, despite a devaluation of nearly 25% since the crash in 2008, the balance of payments in traded goods has steadily grown till last year when it reached no less than £106bn, 7% of GDP. This trend is simply unsustainable. The massive deficit sucked demand out of the economy and unless this was replaced the effect would have been highly deflationary. This could only be done in three ways – either the corporate sector invested more than their retained profits, or households spend more than their net incomes by borrowing, or the government ran a deficit. Once the financial crisis began both business and households deleveraged rapidly, business now sitting on £775bn uninvested and households running down their debts as fast as they could. Then to keep the economy from collapsing, the government had to run a massive deficit. That is the reason why in 2009 the government net deficit rose to almost 10% of GDP. If it hadn’t done so, the UK economy would have suffered an even more severe depression than the one it is already experiencing. That explains why, unsurprisingly, the increase in government debt 2000-2010, a total of £471bn, comes quite close to mirroring the total current deficit of nearly £300bn during those years,
Why doesn’t Labour point all this out, and make clear that there’s no way that government will get rid of its deficit unless the balance of payments position improves, and that won’t happen till the role of the City shrinks and the role of manufacturing industry significantly expands?