Mastering the Shadow of Gordon Brown
Why Labour must stop running from Brown's legacy
The memory of Gordon Brown's time as Chancellor and Prime Minister still hangs stubbornly over Labour's electoral prospects. Since the 2008 global financial crisis hit, the Conservatives have pushed the fallacious economic narrative that Labour's spending policies somehow caused the recession. Although the leadership of Jeremy Corbyn – with his history of rebellion against 'New Labour' – has in some sense mitigated the worst effects of this line of attack, the fact remains that any significant push for higher public expenditure is met with the complaint that Labour 'over-spent' between 1997 and 2010.
Under Ed Miliband’s leadership the party's response to the 'economic credibility' issue was muddled. His defence of the previous Labour Government's public investment sat uncomfortably with his commitment to slash some areas of spending. Corbyn, for his part, has challenged the issue more directly by promising greater spending in key areas and by directly attacking the 'political choice' of austerity. And the 2017 British social attitudes survey found that, for the first time in a decade, more people prefer higher spending and more taxation than oppose it. But the 'over-spending' charge remains a potent weapon in the Conservative armoury.
If Labour is to permanently master the shadow of Brown and put the austerity argument to bed, it must confront the Tory narrative at its historical core. That means taking a closer look at thirteen years that much of the left would rather forget; it also means taking charge of the political dialogue around spending and the financial crash. And in doing so, we might even find that there is far less to be ashamed of than current political dialogue would suggest.
The 'New Labour' brand was launched by Tony Blair and his allies in the mid-1990s as a response to four Tory victories in a row from 1979 to 1992. They believed the party had wasted eighteen years in the wilderness because it had been too left-wing, too ideological, and too addicted to spending. Gordon Brown played a key role in developing a centrist Labour manifesto and, as Shadow Chancellor, pledged that the party would match Conservative spending plans for its first two years in power. He did just that when Labour won by a landslide in the 1997 election. Government spending as a percentage of GDP reached record lows, at around 36%. 'Prudence' was Brown's watch-word.
The belt loosened when those two years were up. Spending on core public infrastructure increased significantly. The specifics of Labour's actions and achievements during this period is a separate matter, but to a large degree their spending increases were met with results; smaller class sizes and drastically reduced waiting times, for example. Nevertheless, many in the party remained wary of the charge of laxity with the public purse, and from this concern arose the principle imbalance of Britain's economic policies under Brown's stewardship.
Some of the increase in spending was funded by steady and consistent economic growth up to 2007; some of it, controversially, was paid for with the much-derided 'Private Finance Initiatives' which sought to fund public projects with private finance. But New Labour only increased taxation, the primary source of government revenue, by 2.3% of GDP. This precarious approach to revenue-raising prompted Polly Toynbee and David Walker to conclude that, far from over-spending, Labour under Blair and Brown under-taxed. It failed, in this view, to match the public's demand for greater investment with an argument for higher taxation. Thus 'tax and spend' simply became 'spend'.
Even so, public finances were not remotely in a state of crisis before the 2008 crash. Brown endeavoured to keep national debt below 40% of GDP – a somewhat random target, but one that he achieved. With a national debt of 36.5% of GDP in 2007-8, Britain's was the second lowest of any major economy (and at historically low interest rates). The budget deficit was just 0.6% of GDP by 2007. It is therefore ludicrous to single out Blair and Brown for 'over-spending' in normal circumstances.
The real failure of Labour's economic management was its refusal to challenge the new orthodoxy of low spending coupled with low direct taxation established by Thatcher. In 1979 the top rate of income tax stood at 83% and the basic rate at 33%. By 1997 the top rate was 40% and the basic rate was 23%. At the same time, the majority of the state's profitable or near-profitable industries were privatized – sold off – creating a government revenue black hole that was only partially filled by the arrival of North Sea oil. Harold Macmillan, who served as Conservative Prime Minister from 1957 to 1963, likened this privatization spree to 'selling the family silver'.
To this can be added the end of 'full employment,' the ideal adopted since 1945 which, for the most part, kept unemployment in the hundreds of thousands rather than the millions. But stringent cuts in government expenditure and the shrinking of the public sector caused unemployment to skyrocket, averaging 11.7% in 1982-5 and 9.3% in 1986-9 – along with the associated welfare bill. It remained below 6% for most of 1997-2007 but unemployment figures in the millions had been normalized, and Brown accepted it. The structural disparity that Thatcherism built into the British economy remains to this day.
For both Brown and Britain, however, the greatest hazard left by Thatcherism lay in the promotion of the financial services sector at the expense of manufacturing. To be sure, the inexorable growth of finance yielded great benefits as well as risks – by the 2000s there was no doubting that London was the financial capital of Europe. But the risks were existential, and from these sprang the global disaster of 2008. The threat of financial meltdown, necessitating emergency spending of extraordinary proportions, is the real source of our present indebtedness.
For the majority of Gordon Brown's time in No. 10, the single greatest issue facing Britain and the world was the global financial crisis. This was the deepest downturn in the financial markets since the Wall Street Crash in 1929. This, like the hollowing out of old government revenue streams, is a complication dating back to the 1980s.
Nigel Lawson, Margaret Thatcher's second Chancellor of the Exchequer, oversaw the deregulation of the finance sector in the late-1980s. The centrepiece of his reforms was the Financial Services Act 1986, setting up the system of 'self-regulation' that, in practice, often meant no regulation at all. The City of London was encouraged to mimic and ultimately rival New York in share trading. While the government came to rely ever more on the City to provide revenue, it allowed Britain's manufacturing base to decline at a faster rate than in any other comparable economy – a trend that continued under New Labour.
In the coming years there were multiple warning signs laying bare the fragility of this new economic balance; on 'Black Monday' in 1987, when shares in London lost 25% of their value; and 'Black Wednesday' in 1992, when currency speculators initiated a run on sterling and cost the government over £3 billion. But the most significant portent of future troubles was the 1997 Asian Crisis, when the effects of a currency crash in Thailand spread with alarming speed and ease to the over-heating economies of south-east Asia.
Brown recognized that the risk of contagion in a globalized financial world was enormous. In a speech in New York he argued for greater spending powers for the IMF and World Bank, as well as closer cooperation in regulating world finance so that developing crises could be contained. On this Brown must receive some credit; for thirteen years from 1997 to 2010 he doggedly made the case for a global solution to a global problem. But the belief in minimal regulation held by most world leaders proved all but immovable.
At home, however, Brown's record cannot be defended so easily. As Chancellor, ensuring that the financial sector was properly regulated was ultimately his responsibility. He declared that the City of London required 'a world-class supervisory framework'. That he failed to produce such a framework is practically beyond doubt.
As well as granting independence to the Bank of England, Brown created the Financial Services Authority (FSA) to form, together with the Treasury, a tripartite regulatory system. This was supposed to be capable of picking up early tremors and alert the government that something was awry. But in practice this apparatus was a paper tiger. A lack of regulatory zeal and coordination between the three bodies left the government none the wiser to the extent of the problem; one that had been brewing beneath the shiny veneer of Britain's banks since 1986.
This problem erupted with daunting violence after Brown ascended to the top office in 2007. The principal issue was the implosion of America's sub-prime mortgage system (in which lenders had agreed to give customers mortgage packages regardless of their actual ability to keep up their payments). Banks across the world had bought into this market with incredible recklessness, meaning almost every major economy was contaminated. Britain's banks, free from proper oversight, were no exception.
The case of Northern Rock became a microcosm of the wider issue when it hit trouble in 2007. It had extended into the property sector beyond what could be safely supported by its flow of capital. When lending between banks seized up following events in America, the Rock turned to the Bank of England for immediate support. Customers, having lost confidence, initiated the first run on a British bank since 1866. It could no longer survive on its own.
Here, as with taxation, Brown's fear of appearing too left-wing prejudiced his response. He was determined to find a private buyer for the Rock but no serious offers were forthcoming. It was only after months of dithering that he decided upon taking the bank into government ownership.
From this point on, however, his actions became more decisive. Recognizing the nature and gravity of the situation when many of his peers did not (with the notable exception of Vince Cable), Brown became a vital cog in the global response to the crash – which soon turned to recession.
The notion of a bank being 'too big to fail' now conjures up universally negative feelings, particularly on the left. To be sure, the banking sector should never have been allowed to develop into the lumbering, unsupervised behemoth that it had become by 2007. But when faced with the immediate prospect of total financial meltdown, the idea of bailing out a bank rather than letting it fail has some paradoxically progressive credentials.
At the time of the crash, the dominant theory regarding bank failures was that bailing them out would pose a 'moral hazard' – that is, it would allow banks to think that there are no consequences for excessive risk-taking. But most leaders had only accounted for a single large bank failing, not for an epidemic of failures. The shockwave from one major bank after another ceasing operations would have had cataclysmic social and economic repercussions. Some integral banks (such as RBS, with an international business larger than Britain’s entire economy) were therefore, in every sense of the term, too big to fail. Recession could readily have turned to depression.
The Brown government, to its credit, took an holistic approach to bailing out the banks. First, the Treasury would buy up toxic assets and replace them with government bills, providing emergency relief for the most infected institutions and thereby restoring liquidity (the availability of lending). Governments around the world were taking similar steps, but the novelty of Brown's response lay in his insistence upon coupling liquidity with recapitalization. In essence, the government would pump hundreds of billions of pounds into the financial sector to ensure banks had the capital to function.
Soon enough every major government was taking similar steps. The pivotal moment came in April 2009 at the conclusion of the G20 conference in London. Brown and Nicolas Sarkozy, the French President, had convinced other heads of government to attend what was usually a conference of finance ministers – a formidable achievement in itself. The headline result of the meeting was a combined $1 trillion international rescue package, the largest ever agreed. But arguably more important was the commitment to unprecedented cooperation between central banks and the creation of a World Stability Board to provide an early-warning-system in future.
It was during this period of hurried financial fire-fighting that the UK's national debt and budget deficit shot upwards. National debt nearly hit 85% of GDP, while the budget deficit increased more than tenfold, to 6.9% in 2010. The social effects were considerable as well, with unemployment peaking at 8.5% in 2011. But, had the government not rescued the banking sector and continued to stimulate the economy in the immediate aftermath, things could have been infinitely worse.
Put simply, Brown did not cause the crash and nor did government spending. The crash was caused by a light-touch (or no-touch) approach to regulation and the failure of successive leaders to challenge that attitude, Blair and Brown included.
In fact, the actions Brown took to contain the crisis helped to prevent a full-on economic depression. At that moment in time, not bailing out the financial system would have been vastly more damaging to the country. The question now is whether we obsess over the fallacious theory of austerity or redirect our efforts towards enacting concrete measures to tame the banking sector. Only by taking the latter route can a repeat of 2008 be prevented.
So why is it important for Labour to make this argument? Why must it return to this uncomfortable time in its history?
The primary reason is that in politics narrative is everything. Labour has handed the Conservatives a monopoly on narrative-building, causing the entire political debate to revolve around a sadistic, factually vacuous portrayal of recent history. Corbyn’s party is presently benefiting from a turnaround in public opinion regarding public investment, but the pendulum will inevitably swing back and the Conservatives will push their aging arguments with renewed vigour.
Labour must permanently change the terms of debate. And to do that, it must confront its fear of Gordon Brown. It should embrace Brown's successes while initiating a public debate about his real failures, particularly banking regulation. Far more emphasis should be placed on the Conservatives’ record as the party of deregulation, because the mess the government complains of inheriting is largely their own fault.
Labour’s long-term prospects therefore depend heavily on the party’s willingness to take ownership of Gordon Brown; to diffuse the tired old Conservative tale about over-spending and to blunt the axe of austerity. It will take patience and courage, but the pay-off could be incalculable.
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