The Deficit

 

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Mike O’Brien has rejected claims by Tory MPs that the last Labour government lost control of public finances. “It does not accordwith the facts” he said.

“Fact: In Margaret Thatcher’s years public spending averaged 40% of gross domestic product; John Major averaged 38%; David Cameron has averaged almost 41%, but Tony Blair and Gordon Brown averaged 37%. So on a historical comparison 1997 to 2010 was a time of strong management of public finances.  And those figures do not exclude the last two years after the banking crisis hit.

“Fact: After 1997 Labour cut the deficit it had inherited and it cut the national debt. “Fact: By 2007 David Cameron was so impressed by Labour’s economic management that, he publicly committed the Tories to sticking to Labour’s “prudent” financial plans. So today Mr Cameron criticises the very plan he endorsed in 2007 - before the banking crisis. Such is politics. 

“Of course Labour did increase spending between 1997 to 2007. Spending had to rise to both save the NHS and to rebuild the crumbling schools with outside toilets that we had inherited. But remember two things.  Firstly, Labour paid for it by tax receipts and won the 2005 election on a promise to raise income tax to fund the NHS.

“Secondly, 1997 to 2008 was also a time when the economy grew in every quarter for 11 years - the best record of any British government in history. That meant that as the UK got richer more taxes were coming in without raising other tax rates.  By contrast after 2010 this government had three years of flat lining and has struggled to get tax in.

“Of course, Labour did have a major problem in late 2008 when the Banks collapsed in America and it became clear that UK banks had invested in American loans.  Labour bailed out UK banks.  If it had not been done people would have lost their savings and pensions. So public spending rose as a share of GDP in 2008-10, although it never hit the level under Mrs Thatcher in 1981-83. 

“The great economist John Maynard Keynes taught us that in an economic crisis we can avoid mass unemployment by the government taking responsibility to spend to save jobs. Labour followed that advice and prevented a catastrophic collapse of the banks.

“But it is important to get the sequence of events right. The budget deficit after 2008 is a consequence of our economic problems, but it was not a cause of them. We have a public sector debt problem not because Gordon Brown went on a public spending spree but as a consequence of a crisis in the private banking system.”

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