Would the Conservatives have avoided the economic crash?

A guest post by Tom Bailey

David Cameron complained in the Queen’s speech debate of 2010 that Harriet Harman had said

Not one word of apology for the appalling mess that has been left in this country. Nothing to say about leaving Britain with a deficit that is bigger than Greece’s. Not a single idea for getting to grips with it. Until they learn what they got so badly wrong I’m not sure people are going to listen to them again.

But is there any evidence that things would have been different under the Conservatives?

New Labour left the British economy in an appalling mess. This is the conventional wisdom according to the Conservative Party and the right wing press. George Osborne argued as Shadow Chancellor in February 2010 that ‘Britain has been failed by the economic policy framework of the last decade’ and called for a ‘fundamental reassessment of monetary and fiscal policy’. Ed Miliband wrote an article defending Labour’s economic record in The Times which prompted Conservatives to argue that he is in denial. There was also a critical editorial in The Times which attacked Miliband’s account as ‘bad economics’. However, Miliband is right to challenge the narrative of the Conservatives and the right wing press. Firstly, the economic crash was principally a failure of the market. Indeed, Adair Turner, head of the FSA, described it as perhaps the ‘biggest crisis of free market capitalism’ ever. Secondly, the crash was a global economic phenomenon which was not unique to the UK. These two points are vital to the history which Labour should be presenting. A balanced history of New Labour’s economic legacy should recognise that there is little evidence to suggest that the Tory party would have either avoided the crash or left the UK better prepared.

The economic failings of the New Labour period should be mediated through a consideration of contemporary Conservative economic policy. Overall, there were three principal errors made by New Labour in the build up to the crash. Firstly, there was insufficient regulation of financial institutions. Secondly, there was no sustained state action to stop the exponential growth of private debt. Thirdly, UK state spending increased at an unsustainable rate. Better regulation would have lessened the UK’s exposure to subprime mortgages, toxic debt and the dangers of overleveraged banks. Acting on the second and third problems would have helped avoid what Osborne has now termed ‘an economy built on debt’ and placed the UK better to deal with the costs of the financial crash. The question to ask is whether these problems would have been avoided or ameliorated had the Conservatives been in power. Would the banks have been adequately regulated under a Tory government? Would the Tories have acted to stop the astronomical growth of private debt? Was New Labour uniquely profligate in its spending? On all accounts, the answer appears to be no. The Conservative party did not propose an alternative to Labour’s economic strategy.

The Conservative Party did not propose substantially lower levels of state spending to New Labour between 2001 and 2007. It was only from 2008 that Cameron and Osborne were condemning Brown for failing to ‘fix the roof when the sun was shining’. This critique omitted to mention that contemporary Conservative spending plans had not mentioned major financial retrenchment. In 2005, Michael Howard promised in the Conservative general election manifesto that ‘over the period to 2011-12, we will increase government spending by 4 per cent a year, compared to Labour’s plans (on current trends) to increase spending by 5 per cent a year.’ That small difference in the rate of state spending growth would not have left Britain’s finances significantly better placed to get through the crash. If Labour has been economically profligate, the Tory economic plans were scarcely different. The Tories did not reject Labour’s economic strategy but embraced it. Indeed, George Osborne promised to match New Labour’s spending increases, believing it to be both electorally popular and economically successful. They had effectively accepted a Blairite settlement. That the Conservative Party is now hawkish about state spending levels does not alter that.

The pre-crash structural deficit is not the primary cause of the current budget deficit. Adair Turner predicted in 2008 that ‘90%’ of extra UK state debt will come from ‘the knock on consequences of a low rate of economic growth’. This has largely been correct as the fall of growth resulted in significantly lower state income. Robert Peston noted in 2008 that ‘there were twin connected bubbles in assets and credit. Both of those bubbles have burst.’ The factor in the current budget deficit was the greater levels of state spending necessary since 2007. There was no alternative to the course taken by Brown in bailing out the banks and the state financial stimulation of the economy. These measures were essential to restore liquidity to the banking system and to stop the recession turning into a depression. The current budget deficit is of course regrettable but preferable to the alternative of a collapsed banking system or a deep recession. As the Tories would not have improved Britain’s state finances, would they have reduced Britain’s exposure to the risk undertaken by financial institutions worldwide?

The banking industry would not have been better regulated under the Conservatives. The Conservative Party has always been the supporter of business: it was under Thatcher that much of the deregulation of financial industries took place. The period preceding the crash was one of genuine confidence in market efficiency. Low level financial regulation was one tenet of an economic consensus which existed both in the UK and internationally for two decades. Indeed, Adair Turner emphasized that the criticism generally being made before the crash was ‘why are you regulating too heavily’? Greater regulation of financial institutions has never been a Conservative cause and was not a policy in either their 2001 or 2005 manifesto. No significant change would plausibly have been made by the Tories to British financial regulation.

The third problem in the British economy was the exponential growth of personal debt. Private borrowing increased faster than earnings as easy credit fuelled a consumer goods binge and a housing market boom. To avoid this problem, there would have needed to be either greater regulation of the provision of credit or higher interest rates as part of a government strategy to lower debt levels. There were no contemporary calls for such a policy, especially not from a Tory party reeling from several heavy consecutive general election defeats. The failure to act on debt was a shameful legacy for New Labour but not one which the Conservative Party would have avoided.

It is unfair to blame the economic crash solely on New Labour. It was a market failure which was not anticipated by their main political rivals, by most economists, the press or the public. A recent Financial Times article highlighted that the IMF’s watchdog judged that the IMF’s failure to predict and prevent the economic crash was a consequence of ‘a “groupthink” mentality’. In 2009, the Queen asked several LSE economists why the crisis was not foreseen. The academics sent her a letter in which it apparently stated that ‘In summary, your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.’ The crash was a global economic phenomenon. There was no fundamental difference between contemporary Conservative and Labour economic policy. Overall there is very little evidence to suggest that the Conservatives would have left Britain better prepared for the current financial difficulties.

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