Recent economic data has prompted debate over whether Labour’s economic inheritance is as bad as the party claims. Tony Yates examines the state of the UK economy, arguing that the truth likely lies somewhere between the positions of the two parties.
Shortly after the general election, newly appointed Chancellor Rachel Reeves said Labour had ‘inherited the worst set of circumstances since the second World War’. Opposition party members have suggested that Labour’s pre- and post-election narrative about the state of the UK economy does not match up with recent encouraging data. New Conservative MP Nick Timothy, for one, posted that ‘Labour are lying to you’ in response to newly released numbers on growth.
Recent data from the Office for National Statistics show that the economy is estimated to have grown by 0.6% in the second quarter of 2024, following growth of 0.7% in the first quarter. And annual CPI inflation has fallen rapidly from the time former PM Rishi Sunak launched his 5 pledges – one of which was a promise to halve inflation – and was 2.2% in July, down from a peak of 11.1%. Sunak claimed that encouraging figures pre-election were signs that ‘the plan is working’.
Who is right? Is the economy in poor shape or not? The truth probably lies somewhere in between the protestations of the two parties.
To begin with, the claim that Labour have inherited the worst circumstances since WW2 is not credible. GDP per capita has grown by more than a factor of 4 since 1945. Life expectancy at birth is about 15 years longer than it was in 1945. At the end of WW2, government debt as a ratio to GDP was 270%. Now that ratio is about 89%.
Labour’s claim that they are taking over after a period of economic mismanagement is better founded in an analysis of what happened from 2010-2024. Although growth seems to have returned in the last two quarters, GDP per capita has increased just 5.6% since 2007, just before the financial crisis, a period of virtual stagnation 17 years long. During that period, life expectancy, which had increased inexorably, plateaued. Many NHS metrics worsened, including – as Labour publicised in its general election campaign – numbers on NHS waiting lists. These increased from about 2.5m when the Tories took over in 2010 to just over 7.6m at the end of 2023.
The perception of economic mismanagement was sharpened by Liz Truss’s short premiership, who resigned after 49 days, during a financial market panic, either begun and/or aggravated by the ‘mini-budget’ of October 2022 which included tax cuts for higher earners funded by government borrowing, and accompanied by promises of regulatory and planning reform. Though government debt to GDP now looks a lot healthier than it did after WW2, it compares unfavourably with the level the Tories inherited in 2010, when it was about 70%, even as they embarked on a platform of fiscal ‘austerity’.
The implication – in the deployment of these facts by Labour’s campaign – is that all this is the fault of the previous government. But there is a debate to be had about how much was due to policy choices and how much was bad luck that would have afflicted whoever was in charge.
Stagnation may well be at least partly caused by the legacy of the financial crisis, Brexit and the severity with which the UK economy was hit by the pandemic. The financial crisis happened on Labour’s watch, although under a regulatory system the Tories subscribed to. Brexit has been embraced by Labour who, despite saying they want to ‘make Brexit work’ have ruled out all modifications that would ameliorate its economic harm significantly. For this reason they have been reluctant to stress Brexit as the cause of our woes, as against its management, despite there being something of a consensus (though not unanimity) that it has significantly harmed UK trade.
The pandemic was not caused by the Conservative administration, of course, but the recent UK Covid-19 Inquiry did point the finger at the lack of robustness/spare capacity in our healthcare system as a contributor to the adverse experience of the UK. One consequence, for example, of restricting funding for spare capacity, particularly in intensive care, was that we had to lock the economy down for longer – and more restrictively – to limit the flow of severe cases to the NHS so that they were not overwhelmed (which would have greatly increased mortality from Covid).
Long periods of stagnation have happened in other countries (Italy, for example or Japan) for reasons that economists can surmise, but hardly attribute with great confidence. GDP per capita varies greatly across countries. Some of this is because there are societies that persist in making bad choices, because policy improvements that are known to work lack support. But, at the same time, why this spread came about and what to do about it is a live and unresolved debate.
Analogously, UK stagnation may not be so easily ended by the new Labour government. Decisively pinning the blame for this on the Conservatives is controversial if we can’t diagnose what was done to bring it about, and can’t predict with confidence what policy changes would reverse it. Improving long term growth and income per head is hard, otherwise these improvements would have been made. So even to the extent that the UK’s longer-term performance has been poor it may not be entirely the fault of the previous administration.
Whoever is right, there is an element of futility about the debate. The Conservative Party are facing inward at the moment, consumed with a leadership contest that is pitched at members. The voters at large, though, seemingly bought Labour’s version of events – hence the Conservatives lost. As time marches on, and the memory of 2010-2024 fades, the debate on which the next election turns will not be about Labour’s historical legacy, but what it has done with power since it took over.
Leave a Comment