Did Blair sow the seeds of recession?

Should the worst economic recession since the Second World War lead to a reappraisal of the Blair years?

Back in 2007, on the anniversary of Labour’s ten years in government, the Blair years didn’t look too bad at all. Britain under Labour had enjoyed strong economic growth, low inflation, rising prosperity for most people, high levels of employment and falling poverty rates. And the eye-watering scale of investments in public services since 2000 appeared to be making good the failure of successive Conservative governments in the 1980s and 1990s to mend hospital and school roofs (and much else besides…) when the sun was shining.

To be sure, critics on the left accused the Labour government of not doing enough to challenge the market orthodoxies established in these Conservative years. And on the right, the view was that this Labour government was proving just as tax and spend as past ones. Standing back, ‘New Labour’ walked a tight-rope between business-friendly economics and an activist welfare regime that put social justice back on the political agenda. This might not be any old Labour government. Tony Blair and Gordon Brown had bought too far into the central reforms to the UK’s political economy engineered by Thatcherism for that. However, it was doing recognizably Labour things (such as reducing child poverty), even if it wasn’t doing them in recognizably old Labour ways (using the private sector to provide public services). But this, surely, was what was new about New Labour in the first place.

Where does the Blair legacy stand two years on? In truth, cracks were appearing in this legacy even as Labour celebrated its ten years in power — and these cracks are widening with every day the country plunges deeper into recession.

The Blair years saw rates of employment rise to 75 per cent of the working age population and unemployment fall significantly. But after 2001, the balance of employment growth shifted from the private to the public sector raising concerns that the government’s record on jobs was being fuelled by public spending not private enterprise. Concerns were also raised that ‘British workers’, in Gordon Brown’s terms, weren’t getting the jobs in British workplaces — these were going to industrious migrant workers from Poland and other recent European Union accession states. Figures from the Statistics Commission in 2007 suggested that foreign workers accounted for 50 to 80 per cent of the increase in employment after 1997.

Brown’s point was that workers in Britain needed the training and skills to compete in what was in effect a global labour market. Economic nationalism was no answer. The current recession, which has seen unemployment break the two million mark, will only make the competition for jobs more intense — and doing something about it even harder. The days of generous public sector employment is over as spending is squeezed following the 2009 budget. Future employment growth will have to come from business not the state.

High rates of economic activity in the Blair years were also, paradoxically, matched by a continuation of the high rates of economic inactivity (around 21 per cent of working age people) established under previous Conservative governments. Demand led growth in jobs did not significantly reduce this welfare dependency. Labour had some success with its New Deal programmes and the fiendishly complicated tax credits system to ‘make work pay’. The employment rate for single parents went up from 46 per cent in 1998 to 57 per cent in 2007. Otherwise, for two and half million people of working age on long-term incapacity benefits in particular, welfare to work didn’t work under Labour. And the government knew it. Welfare reform legislation kept coming, provoking Labour backbench revolts. The Conservatives urged the government to go further and faster. So did David Freud, appointed in 2006 by Blair to look into welfare reform. By early 2008, government and opposition agreed, more or less, on what was to be done, even if economic recession and mass unemployment will make it harder to achieve (and Freud has now been poached by David Cameron for the Tories).

Labour’s record on jobs did help poverty rates to fall, at least up until 2005. In 2004-5, 20 per cent of the population were in low-income households, down from highs of over 25 per cent in the mid 1990s. After 1997, relative poverty rates fell for children, pensioners and working-age parents, though there remained marked differences in rates, not least by locality. But the fall in poverty stopped. In 2005-6, poverty rates moved up as a result of falling incomes at the bottom of the income scale due to lower wages and smaller increases to social security rates, calling into question the government’s target to halve child poverty by 2010 and ‘eradicate’ it by 2020. Figures for 2006-7 showed poverty rates creeping up for the second year running.

The Blair years were also marked by massive increases in spending on public services — and a real attempt to reform these services. Such reforms, just as they had done under the Conservatives, threatened established working practices. This made them difficult to deliver, not least for a Labour Party deeply rooted in public sector trade unionism. It is not for nothing that Andrew Adonis given the job by Blair to reform schooling with his academy programme found the going tough.

How does this record of reform stand now? Concerns have long existing that the government wasn’t getting value for its money. Figures this week from the Office for National Statistics show that as public spending increased, public sector productivity fell — although the data for 2006 and 2007 suggest the government’s reform programme may now be paying dividends.

Blairites, like the academic Julian Le Grand seconded to advise the government, urged far more radical market-type reforms to boost public sector productivity. Brown, in his Treasury days, dug his heels in. The Conservatives, who have more or less embraced the Blair rather than the Brown version of public sector reform, will not find this easy going either, especially in tighter economic times. Blair’s ‘forces of conservatism’ haven’t gone away. Some centre-right think tanks have urged the Tory leader to be bolder in breaking with Labour, in particular on the structure and funding of the NHS. With public spending under tight control in the years to come, the capacity to get the most from this spending will be high on the political agenda. The pressure to find alternative sources of funding in health, in particular, will also be intense.

Having said this, the Blair years were a significant social policy counter-weight to the economic reforms of the Thatcher-Major years. Labour boosted the incomes and opportunities of the poor in Britain, largely through significant increases in public spending on public services and income transfers, in particular, tax credits. Despite this, however, Britain remains a divided society, as a report from the OECD showed this week. Affluent areas have become more affluent on Labour’s watch, poorer areas have been left further behind. But helping what the Tories like to call Britain’s‘broken communities’ is no easy task. The rising tide of economic prosperity did not raise all boats and a falling tide will leave many more high and dry. Setting the framework for social security, even providing hospitals and schools, is one thing; changing the often engrained patterns of human behaviour that stifle opportunity, is quite another. New Labour tried — and we got the ‘nanny state’. The Conservatives are promising ‘libertarian paternalism’ and an even more targeted approach to welfare provision.

The Blair years, then, were marked by large increases in public spending master-minded by Gordon Brown. As unemployment fell and economic growth surged ahead, public spending jumped from around 36 per cent of GDP in 2000-01 to around 41 per cent in 2005-6. But spending was outpacing growth. Many economic analysts saw a black hole looming in the public finances — and the chancellor being anything but prudent. Brown just about stayed ahead of his naysayers, not least with a bit of crafty public accountancy. But it couldn’t last. Boom would turn to bust, whatever Brown’s Canute-like prophecies. At the 2005 election, former Conservative chancellor Ken Clarke remarked that eventually all Labour governments run out of money — and so this one has. Like the buy-to-let investor who prospered on a pile of debt and rising asset prices, recession and deflation exposed the government to an inconvenient truth. Britain was broke.

So, were the Blair years to blame? Conservative’s claim the Blair government played fast-and-loose with macro-economic policy and ‘failed to mend the roof while the sun shone’. Instead of saving a bit, Labour spent (and raised taxes on the quiet to help pay the bills). And interest rates were too low for too long, undermining saving and fuelling private debt. No doubt Labour’s macro-economic policies in combination with the newly independent Bank of England kept the UK economy (and public spending) growing, but in the end it grew too fast. And there are now serious questions being asked about the regulatory framework established by Labour back in 1997, in particular, the division of responsibilities between the Bank of England and the Financial Services Authority. But it could also be said that the tighter monetary conditions in the eurozone kept some EU states growing too slowly, with higher rates of unemployment, and Labour sensibly kept out.

While Labour did spend, spend, spend, it has also paid back some of the national debt. Indeed, the UK entered the recession with lower rates of public debt than Germany or Japan. Levels of public debt will of course soar in the next few years as the government borrows to pay the bills — and government needs investors to buy all this debt. But the really important question is whether this debt can be paid back — and what the consequences of doing this are. There is so much that is unknowable here. Forecasting models are only best guesses. If growth returns soon, as Alistair Darling is hoping, then Britain’s bottom-line problems with the public finances should be manageable. If it doesn’t, we are in for some harsh cuts in public services — and some tough decisions about the size of the state.

Government and opposition, so long united in the Blair years on economic policy, are now divided once more. In the blue corner, we have the Conservative’s hair-shirt Austrian economics (‘a government of thrift’) and in the red, Labour’s turbo-Keynesianism. In reality, for the moment at least, policy debates are about the growth in public spending, so the dividing between the two main parties is less than it seems. But with the collapse in tax revenues, not least from the City of London, where will the money come from in future to pay for public services and the public debt?

This question raises one last debate about the Blair years — the balance between financial services and the rest of the British economy. Before the recession, financial services provided a quarter of total corporation tax and a large slice of income tax and national insurance contributions. The fall in these taxes is leaving quite a hole. Who or what is going to fill it?

By 2002 business and financial services had passed 30 per cent of total UK output for the first time. UK manufacturing was down to 16 per cent. Some critics of the Blair government wished Labour would follow a more ‘developmental’ model of the state, supporting industries in a way seen in other parts of the world. Yet Blair’s government was hardly laissez faire. Part of Labour’s supply side economics was to help British industry to close the productivity gap with its competitors. Labour had a ‘manufacturing strategy’ and a host of micro-initiatives to encourage new working practices. However, in the end, the Blair government let MG Rover fold. This was a New Labour government, not an old one.

The collapse of banking and the financial services, and their re-regulation, as well as lower exchange rates, will, in the longer term, encourage a shift of investment and talent to other sectors of the economy — not only manufacturing industries such as engineering and electronics but also knowledge-based sectors like advertising and the cultural industries. But still the banks and other financial industries the public now hate will help pay the public bill. Squeezing the rich may win Labour votes at the next election, though probably not in the right places, but it won’t raise the kind of money the government really needs.

The Blair years will be under intense scrutiny as the next election approaches. The New Labour record is in danger of being lost in the surge of anti-political sentiment sweeping the country. But while Britain under Blair sometimes lost its balance, this needs a correction, whichever party wins the next election, not an about-face.