The IMF and Labour's economic record

Labour's macroeconomic management during 1997-2010 is a matter for celebration rather than apology.

Robert Eastwood
16 June 2015
Labour Conference

Labour has failed to defend its economic record. Flickr/Adrian Scottow. Some rights reserved.

Some candidates for the Labour leadership seem inclined to concede that the 1997-2010 Labour government deserves blame for errors in macroeconomic policy, in particular fiscal policy. They would be wrong to do so.

The rise in the ratio of public debt to GDP, linked to a high fiscal deficit, occurred in the crisis period 2008-10. Fiscal policy during the crisis has not been subject to serious criticism from any quarter, which implies agreement, however sotto voce, that the rise in debt was an inevitable consequence of the crisis itself, resulting from the associated drop in tax revenue together with essentially forced policy responses, such as bank rescues. Therefore attention should focus on the pre-crisis period between 1997 and, say, the bankruptcy of Lehman Brothers in September 2008.

Assessing the evidence

For a hindsight-free impartial assessment of policy in this period, the best source is surely the IMF. Its last two Article IV Staff Reports on the UK before September 2008 were published in February 2007 and July 2008 and are readily available online.

In the February 2007 Report we find (p.3):

Recent developments reflect a continuation of a decade-long record of strong and steady macroeconomic performance. During 1996–2005, the growth of real GDP per capita was higher and less volatile than in any other G7 country. Unemployment and inflation were low and stable, and the current account deficit was moderate. Recent and planned macroeconomic policies, in a broadly supportive international environment, are well-suited to sustaining these strengths.

The 2007 IMF Staff’s fiscal projections for 2006/07 through 2011/12 (p.19) show a cyclically-adjusted current balance averaging zero and a debt to GDP ratio below 40% throughout, exactly in line with the Labour government’s Code for Fiscal Stability.

The July 2008 Report, which takes the March 2008 budget into account, states (p.3):

For over a decade, the United Kingdom has sustained low inflation and rapid economic growth – an exceptional achievement. This is the fruit of strong policies and policy frameworks. These now face new tests from the ongoing global shocks to financial markets and energy and commodity prices.

Rejecting the myths

At the time only a moderate and short-lived downturn was predicted, so the 2008 IMF Staff’s fiscal projections (p.36) show only slight deterioration from those of the previous year, a cyclically-adjusted current deficit again averaging zero, over 2007/08 through 2012/13, but with debt reaching 42% of GDP by 2012/13. Minor differences between the government and the IMF on fiscal policy (p.21) refer not to the 2008 budget decisions themselves, but to the economic outlook and therefore the policy adjustments from 2009 on that might be required to stay within the fiscal rules. Since the IMF was somewhat more pessimistic than the government regarding GDP growth, its medium-term forecast for debt/GDP was slightly higher than that of the government and implied a minor overshoot of the 40% target.

The right response to a Big Lie is unequivocal rejection rather than compromise. Labour's macroeconomic management during 1997-2010 is a matter for celebration rather than apology. By far the most important macroeconomic decision it had to take in that period was in monetary policy – whether or not to join the Eurozone – and it got that right by preferring cool realism to romanticism. Financial regulation in the UK (and in almost all western market economies) was certainly inadequate pre-2008. But the Brown government has rightly been credited for its quick and decisive action to limit the damage after the crisis struck.

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