How Gordon Brown wrecked the UK economy

A recent article in The Economist provides a graph that illustrates the destructive nature of Gordon Brown’s economic policies:

When Labour took power in 1997, public spending was about 19 percentage points lower than in Sweden (58% vs. 39%.)  Tony Blair and his chancellor of the Exchequer Gordon Brown initially tried to reassure markets with a responsible fiscal policy.  But in their second term Brown started raising spending as a share of GDP.  Today UK spending is only about 2 percentage points behind Sweden (53% vs. 51%.)  Some progressives excuse this performance by pointing to the fact that spending normally rises in recessions.  But this argument fails for several reasons.  First, if true then spending should fall as a share of GDP during good times.  But Brown did exactly the opposite during the preceding boom years.  He ran the same sort of deficits that Krugman excoriated Bush for running, but Brown received praise from Krugman.  Not only did spending not decline as a share of GDP during the boom years–it actually rose.  And of course Britain also had many of the same dysfunctional banking policies as the US, such as privatizing gains and socializing losses.

There is another problem with the recession excuse for high UK spending; it isn’t clear that the UK will recover from the recession.  This may be the new normal.  And that’s because the huge expansion of the British state has damaged the supply-side of the UK economy, leading many economists to predict trend growth for the foreseeable future.  No wonder the Cameron government sees a need to restrain spending.

Some might argue that the British state is still slightly smaller than the Swedish state, and Sweden is doing relatively well.  Yes, but Sweden has much more pro-market policies in many other areas, and indeed is moving towards capitalism as the UK becomes more socialistic.  Here are some examples from the article in The Economist:

Without dumping the generous Swedish social model, the government has tweaked it in the direction of lower taxes and smaller welfare benefits. Mr Borg calls this “reinforcing the work ethic”. Mr Reinfeldt talks simply of making work pay.

The results have been spectacular. After long being a case study in jobless growth (except in the bloated public sector), Sweden has become a big creator of private-sector jobs. The government has narrowed the “tax wedge” that deters employment and whittled away at sickness benefits: Sweden no longer stands out for welfare excesses. The retirement age has risen to 67. Inheritance and wealth taxes have gone. Mr Borg and Mr Reinfeldt believe firmly in ownership as a driver of prosperity.  . . .

Unlike Britain, Sweden is happy to let private schools and hospitals make profits from taxpayer-financed services if outcomes are better.  . . .

Some 40 years after becoming the only continental European country to switch its motoring from left to right, Sweden is making a similar political shift. By 2014 Mr Reinfeldt will have been in power for eight years. Given the economy’s strength, few would bet against his winning again. To many on Europe’s left, Social Democratic Sweden was once a statist paradise. Now it is the right that looks north for inspiration.

Cameron is a fan of the Swedish center-right government, and would like to move the UK in that direction.  But he will probably fail.  British voters have no stomach for the savage inequalities of Swedish-style laissez-faire.  They won’t tolerate public money going to for-profit schools or health care.  Instead, Cameron has signed on to increasing the top rate of income taxes from 40% to 50%.  Eliminate inheritance taxes?  I don’t think so.  Follow Denmark in privatizing firefighting?  Don’t make me laugh.  The British public likes big government, and they are going to get it.

BTW, some progressives blame Britain’s problems on fiscal austerity.  In the next post I’ll show why that argument is false.


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25 Responses to “How Gordon Brown wrecked the UK economy”

  1. Gravatar of marcus nunes marcus nunes
    7. July 2011 at 06:44

    On a study I did some time ago, I found that between 1981 and 1990, G/Y in Britain dropped from 48.5% to 39.7% (and stayed at that level for the rest of the decade as you indicate). During this period growth averaged 3.4%, which compares favorably with the 1.8% growth observed during 1971 1981 when G/Y went from 41.5% to 48.5%. This was an interesting result because in 1981 a letter was sent to The Times signed by 364 economists, many famous professors (Willem Buiter was one) radically opposed to the proposed 1981 budget cuts because “the proposed policies would deepen the recession and threaten the country´s social and political stability…”.
    Yes, they have a preference for big government!

  2. Gravatar of Morgan Warstler Morgan Warstler
    7. July 2011 at 06:48

    Two weeks of this… none stop hit the progressives, over and over.

    THEN, a post or two on conservatives. And right back at them.

    Prestige and traffic will follow.

  3. Gravatar of Brett Brett
    7. July 2011 at 07:16

    Sweden has done a ton of pro-market regulatory reforms over the past decade that have boosted productivity growth, although The Economist is right to point out that private sector job growth was anemic until recently.

    Follow Denmark in privatizing firefighting? Don’t make me laugh.

    Nitpick, but technically the Danish did what the US has done when we contract out prisons to private firms, or hire firms to do National Security work in Washington D.C.: they contracted a private firm to do the public service, paid by taxpayer money. They haven’t really “privatized fire-fighting”, anymore than the US has “privatized” National Security.

  4. Gravatar of How Gordon Brown wrecked the UK economy 2011 | FIGURES.THE.WORLD How Gordon Brown wrecked the UK economy 2011 | FIGURES.THE.WORLD
    7. July 2011 at 07:23

    […] How Gordon Brown wrecked the UK economy […]

  5. Gravatar of Tomasz Wegrzanowski Tomasz Wegrzanowski
    7. July 2011 at 08:27

    Inheritance taxes are easily some of the least damaging taxes of all, and any thinking to the contrary requires fairly ridiculous assumptions on human rationality and intergenerational sharing.

  6. Gravatar of Joe Joe
    7. July 2011 at 08:39

    Scott,

    You should do an epic post one day listing every single free market thing that Denmark and Sweden have ever done over the last 20 years. It would be like an epic compendium. It would be a wonderful way to contrast scandinavian left wingers from American ones. It could be like a excel spreadsheet that one updates every few months. Or, at least, somebody out there has gotta be keeping track of this.

  7. Gravatar of Scott Sumner Scott Sumner
    7. July 2011 at 08:56

    marcus, I agree. But in fairness you should note that some of the decline was cyclical, from cycle peak to cycle peak the decline was smaller. Still, the point is valid.

    Morgan, I look forward to more readers, just not more commenters. :)

    Brett, Thanks for that info. I’d explain the “until recently” as resulting from the fact that some of the labor market reforms are fairly recent.

    Yes, I was using the term loosely, but I think others often use the same term for contracting out.

    Tomasz, Inheritance taxes are taxes on capital, and hence among the worst taxes of all. In addition, they are unfair, as they tax thrifty, socially productive rich people at much higher rates than selfish, hedonistic rich people.

    Joe, I’ve thought about that, but I need a source that lists all the Nordic market reforms in one place. Know of any?

  8. Gravatar of Joe Joe
    7. July 2011 at 09:36

    I’ve been trying to find stuff. Here;’s one from the late 1990s, its by Richard Freedman, who’s a very prestigious economist.

    http://www.nber.org/books/free97-1

    The following is a post recession update of Sweden

    http://research.chicagobooth.edu/economy/research/articles/235.pdf

    But still, not good enough. There is a Swedesh libertarian think tank Timbro. I will send them an email.

  9. Gravatar of JPIrving JPIrving
    7. July 2011 at 10:17

    Blowing up the myth of the socialist Nordic model is such an effective tool for defanging the Angloshpere left. They wish so badly that Scandinavia gives them cover for statism, and just hope no one will tell the truth. In reality France or Italy are probably a better model of what free reign Democratic or Labour party policies would bring.

    Can you believe Sweden’s official fiscal policy is to run *surpluses* during expansions?!

  10. Gravatar of Morgan Warstler Morgan Warstler
    7. July 2011 at 10:47

    Joe, great idea.

    Scott, then adopt Facebook comments. Since everyone has to be use their real name, comments drop.

  11. Gravatar of Richard W Richard W
    7. July 2011 at 12:56

    I am not a Brown supporter so have no particular reason to defend him. However, this post is pretty simplistic. Page 10 of the independent IFS green budget from 2007 gives a bit more detail and nuance.

    http://www.ifs.org.uk/budgets/gb2007/gb2007.pdf

    Politicians do not inherit a year zero economy. The previous government had reduced net investment in capital expenditure . So investment had to be increased just to catch up with the infrastructure investment that the previous government had ignored. Moreover, they put significant resources into reducing child poverty with a great deal of success. That had the added benefit of raising the employment level to record levels as mothers who previously claimed welfare benefits returned to the workforce. Things are a tad more complicated than you are presenting.

  12. Gravatar of Lorenzo from Oz Lorenzo from Oz
    7. July 2011 at 14:35

    Richard W: even granted everything you say is true, that nowhere near explains or justifies either the level of increase in government spending or (particularly) the increase in public debt. Besides, I don’t think Scott was claiming the increased government expenditure was a total waste.

  13. Gravatar of Lorenzo from Oz Lorenzo from Oz
    7. July 2011 at 14:37

    So, the massive-income-transfer welfare state largely continues to be a device for replacing private saving with public debt. Not a historical form likely to have a long future.

  14. Gravatar of Britmouse Britmouse
    7. July 2011 at 15:27

    Brown thought most social problems could be solved doing more income redistribution, and then went on to disprove this theory. He redefined “Child Poverty” as families with income 40% below the median, and then tried to tweak the tax credits system to move people over that line. It didn’t work – and I’m sure he would claim it was because they didn’t go far enough, not that the theory was wrong. They should have listened to Frank Field.

    It is depressing to look at that public spending graph, and the debt figures, and then to see the teachers striking over a 3% pay cut. I fear Scott has it dead right about British voters, too.

  15. Gravatar of Scott Sumner Scott Sumner
    7. July 2011 at 16:47

    Joe, Thanks. It would be great if I could find a 2011 book as complete as that 1997 study.

    The more recent article is interesting, but mostly makes me realize how little I know.

    Thanks JPIrving,

    Morgan, I’m not on Facebook.

    Richard, I agree that a 261 page budget summary gives a little more nuance, but I’m not convinced. Infrastructure is not that big a share of government spending. Britmouse contests your assumptions about the reduction in child poverty, and I don’t know enough to have an intelligent opinion either way.

    When I visited Britain near the beginning of the Blair administration it seemed much improved over the mid-1980s (when I lived in London.) Has there been much more improvement? Perhaps, but that’s not the sense I get reading periodicals like The Economist. Has the extra NHS money boosted life expectancy?

    In general, I think 50% is way too high for government spending, particularly for a country that doesn’t have an efficient government. Unlike France, the UK isn’t good at infrastructure. Unlike the Nordics, it’s not good at running a welfare state. (BTW, I’d say the same about the US.) I plan a post soon on Australia, which does fine with a much lower level of government spending. Indeed I think Cameron should study what they’ve done in Australia, and see how much could translate over to the UK.

    I accept your criticism that this post is simplistic, but I still think my basic point has some validity.

    Lorenzo, That’s a good point about the switch from private savings to public sector social insurance.

    Britmouse, It’s interesting that you and Richard differ over child poverty. Is there data that is generally accepted?

  16. Gravatar of Morgan Warstler Morgan Warstler
    7. July 2011 at 20:05

    Scott, 700M people are on Facebook, you have a blog, and no cell phone.

    At some point charming becomes weird.

  17. Gravatar of Richard W Richard W
    7. July 2011 at 22:51

    The second chart down for households at the tenth percentile of the income distribution shows the improvement.
    http://lanekenworthy.net/2010/12/14/has-rising-inequality-been-bad-for-the-poor/

    This Guardian article gives some child poverty figures.
    http://www.guardian.co.uk/society/2011/may/12/labour-final-year-child-poverty-lowest-level-1980s

    I don’t want to seem as if I am defending their record. I don’t support any of the parties but usually vote for the Lib Dem candidate. However, they did do some good things and some useless. The bottom quintile did enjoy some income growth after faring the worst of all income groups under the previous Conservative government. Moreover, the Conservative hysteria over spending is a bit hollow since they fought every election since 1997 promising to match Labour’s spending.

    The 50% public spending is a myth. Spending climbed from just over 38% in 1997 to 41% and was falling until the financial crisis hit. It shot up when GDP plunged. The tax take increased by less than 1% 1997-2008
    http://4.bp.blogspot.com/_tvshDVnXSLc/TCEv3wUZBDI/AAAAAAAAC8Q/yxIx22x-5io/s1600/balance+budget.jpg

    If they were doing so badly on the economy it did not show in productivity. UK productivity has been the fastest growing in the G7 since 1991. The 1997 onwards period takes up a fair proportion of that.

    ” Revised estimates for 2009 show that the UK’s productivity level, on a Gross Domestic Product (GDP) per worker basis, was above that of Japan, similar to that of Canada and Germany and lower than that of Italy, France and the US, which continues to lead the G7 countries. On a GDP per hour worked basis, which takes account of the different working patterns across countries, UK productivity is above Japan, on a par with Italy and Canada and below France, Germany and the US.

    GDP per worker: growth since 1991

    The International Comparisons of Productivity Statistical Bulletin also documents productivity growth since 1991 for the G7 countries. In terms of GDP per worker, UK productivity increased by 40 percentage points between 1991 and 2007, the fastest of all G7 countries. However, UK GDP per worker fell by 6 percentage points between 2007 and 2009. Similar falls in GDP per worker occurred in Germany, Italy and Japan. The US was the only country of the G7 to experience an increase in GDP per worker over the past two years.

    GDP per hour worked: growth since 1991

    In terms of GDP per hour worked, UK productivity grew by 44 percentage points between 1991 and 2009, the fastest of all G7 countries. However, growth patterns in recent years have changed: in 2009, the UK experienced the largest fall in GDP per hour worked of the G7 countries. ”
    http://www.statistics.gov.uk/cci/nugget.asp?id=160

    Great to see you back blogging. I tend to agree with your thesis about tight money and the prospect of a UK QE2 is a real possibility later this year. However, I think a debt overhang is still holding the UK economy back and I never see you mentioning debt very much.

  18. Gravatar of Britmouse Britmouse
    8. July 2011 at 04:15

    Child Poverty; don’t know how “generally accepted” these stats are, but they are the official ones:

    http://statistics.dwp.gov.uk/asd/hbai/hbai2010/pdf_files/full_hbai11.pdf see e.g. figure 1.2 on p34; Labour’s child poverty drive started around 1999/2000, if I recall rightly; the new tax credits system around 2003.

    There most significant move since then was the flattening of the income distribution curve between 2007-2009, as the real median income fell but index-linked welfare payments kept the lower end of the curve stable. So maybe Brown would say the recession was a resounding success.

  19. Gravatar of Scott Sumner Scott Sumner
    8. July 2011 at 17:17

    Richard, That’s an impressive list of stats, but they can be interested in various ways:

    1. The rising incomes at the low end graph stops around 2005. I’d like to see more recent data.

    2. The second link reports child poverty rates at 20%, same as under Thatcher in the 1980s. Perhaps the trend is better now.

    3. I certainly agree that some of the increase in government spending was the recession, but I don’t think it all was. The 20% VAT and 50% top income tax rate are clear indications that government will be bigger after the recession than before. I don’t expect Britain to ever get back to the old GDP trend line, so I don’t expect the ratio to fall back to 41% when the recession ends in a few years.

    4. When a government wrecks an economy with big government policies, the rot sets in gradually. Britain did very well after the Thatcher reforms, and into the early Blair years (when government stayed smallish.) That pushed Britain ahead of many other big industrial economies, such as Germany and Japan. But right now I think Germany has a brighter future. Since 2003 productivity growth and real income growth has slowed sharply in Britain, according to reports I read.

    Obviously the term “wrecked” involved some hyperbole, things will limped along. By my definition the US is also a mess. But I think Britain has lost the edge that pushed it ahead so rapidly in 1985-2001.

    Britmouse, Glancing at the graphs it looks like economic growth (1998-01) did more than higher spending (after 2001) But I’ll admit that I am only glancing at that 272 page report–not enough time to read it. I’m sure all that money did something, but I still think growth is the major factor.

  20. Gravatar of ssumner ssumner
    8. July 2011 at 17:37

    Morgan, Successful people are often weird. How about you? :)

  21. Gravatar of Neil Wilson Neil Wilson
    8. July 2011 at 22:38

    There is no evidence that government is crowding anybody out. If you look at the sector statistics you find that private sector corporations have been hoarding cash since the beginning of the millennium.

    In that environment the government has to pick up the slack – and you can do that either by the government spending or by slashing back taxes.

    There are five million people who want work according to the statistics office and 500,000 vacancies. That statistic tells you that the government is either not spending enough, or is taxing too much given the level of private sector savings.

    What we need now is to slash taxes or increase government spending even more to get demand up to a level where the hoarders decide that there is more money to be made from business than from hoovering up government gilts.

    The most appropriate solution IMHO is to implement a Job Guarantee, or Employer of Last Resort programme.

  22. Gravatar of ssumner ssumner
    9. July 2011 at 05:53

    Neil, I never argued crowding out was occurring. In any case, if you think Britain needs more AD, you should be calling for easier money, not more wasteful government spending. The UK government is already spending 50% of GDP!

    It’s the central bank’s job to control AD.

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