Did Labour over-spend in government?

8 June 2015

Did Labour over-spend in government? The question became a big issue at the end of the Election campaign and is front and centre for the Labour leadership candidates. Yesterday David Smith (£) presented his evidence for the prosecution. Other commentators, from Martin Wolf (£) to Ben Chu, have either defended the levels of spending or said that the whole question doesn’t really matter.

To be fair to Labour, the question should arguably be, “Did Labour over-spend in government with the support of the Conservatives?” At the beginning of the 2001 Parliament, Shadow Chancellor Michael Howard de facto supported the then Government’s spending plans. David Cameron and George Osborne did the same in the 2005 Parliament.

Equally, Labour perhaps isn’t getting enough credit for shifting its position well in advance of the Election. Before the 2013 Spending Round, Ed Balls went on the record to say that, “the last Labour government did not spend every pound of public money well”. Patrick Wintour’s wonderful analysis of the Labour defeat shows that we might be having a very different debate if Ed Miliband had simply stuck to his lines in the last Question Time debate:

“[an adviser] had prepped him for a likely question on whether the previous Labour government had spent too much… The prepared answer, broadly, was: ‘I don’t think every penny was well spent. I can give you plenty of examples where the last Labour government did not spend money well and, as someone who believes that spending on health and education can change lives, it is incumbent on me to make sure that every pound is well spent. But if you are asking me, ‘Did that spending actually cause the crash?’, the answer is ‘No.’ The answer lies in failure to regulate the banks.’ Instead, when an audience member asked him: ‘Do you accept that when Labour was last in power, it overspent?’, Miliband began his answer, ‘No, I don’t,’ to gasps from members of the audience.”

People’s views of levels of public spending will inevitably be coloured by their personal views on the ideal size of government. As a result some people will always disagree on this question, and even on what evidence to use.

The points that Reform made at the time were:

  • Whatever anyone’s view of the right size of government, the Labour Government crashed through its borrowing forecasts. For the years 2002-03 to 2007-08, the then Treasury predicted borrowing of £66 billion across those years. It ended up borrowing over £200 billion.
  • The extra spending did achieve improvements in public spending, but not commensurate with results. The then Government promised that reform would come with the extra spending, but the reform lagged far behind. In 2004, Professor Nick Bosanquet argued that a failure to develop alternatives to hospital care would cost up to an additional 2 per cent of GDP over the long term.
  • Similarly: the “flash flood” of extra money came in such quantities and so quickly that public services didn’t know how best to use it.  The IMF made the point at the time.

This last point would be my rejoinder to Ben Chu, who argued that the productivity of the extra Labour spending is really immaterial. In fact, if the productivity of public spending is low, Governments are going to have spend more and eventually tax more than they have to. Voters would be forgiven for seeing that as bad economic policy all round.

The lack of reform would be my key argument that the last Labour government did over-spend. That is why it is so heartening to see Labour voices take such a pro-reform stance since the Election.

Andrew Haldenby, Director, Reform

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