An article by Professor Simon Wren – Lewis in the latest edition of the Oxford Review of Economic Policy nails the lie that Labour was responsible for the financial crisis The article seeks to adjudicate whether the financial crisis that started in 2008 was a stroke of bad luck and did not reflect on Labours fiscal policy framework or the framework was a cause of the crisis.
Labour set out its fiscal policy framework in 1997/8 with clarity. On the basis that previous governments had not invested enough, it devised the Golden Rule and set a target of debt to GDP ratio of 40% to moderate the effect of public investment.
At the same time Labour introduced measures to improve transparency and to avoid biased forecasting in the fiscal system that were well ahead of what other countries were doing. Initially fiscal policy was tight but later there was expansion, notably on health.
As the crisis of 2008 was unforeseen by anyone -“a near universal error”, this expansion should not be criticised with hindsight. In fact the debt in 2007/8 was 36.7% of GDP compared with 40.5% in 1997/8 and 29.7% in 2001/2 – showing a reduced debt until the crisis impacted.
Prof. Wren -Lewis agrees that it could have been preferable to keep the ratio down to 30% but expansion was not unreasonable in the perceived optimistic circumstances of the time.
When the crisis hit in 2008 Labour took significant measures to counteract the deficit caused by the recession, leading to an increased debt ratio. These measures were, Prof Wren-Lewis argues, well within the measures recommended by accepted macro-economic theory and evidence. He applauds the attempts to stimulate the economy being prioritised over debt reduction.
He concludes that “The line that the Labour government was responsible for leaving a disastrous fiscal position which requires great national sacrifice to put right is pure spin”, and that Labour should be praised for taking the timely measures it did to mitigate the effects of an externally caused financial catastrophe.
Report by John Christie