Sunday, 2 March 2008

New Labour’s Economic Miracle: A Post-Mortem

(There are a few tables in this post and for some reason blogger puts a load of blank lines before each table. I'll fix this when I find out how; for now just keep scrolling down...)

For the first ten years of New Labour’s misrule of the United Kingdom Gordon Brown was feted as a miracle-working chancellor of the exchequer who was delivering unprecedented continual economic growth and perpetually increasing prosperity; at least he was by those unable or unwilling to look behind the smoke and mirrors.

Of course many of us have considered him a liar, a cheat and a self-serving hypocrite since his first day in office. But to the general public, and those who deemed their star hitched to his wagon, he was Brown the bountiful. But in the last twelve months the wheels have been coming loose on that wagon and now it is probably not too early to start the post-mortem on a golden era that was only ever made of fool’s gold. (Ironically Brown sold off the UK’s gold reserves early in his tenure, at a price so low gold has never been that low again.)

For his first two years Brown followed slavishly the spending plans left behind by the outgoing Major administration. His watchword was “prudence” and in fact these were arguably the only two years of his tenure during which he did a good job. By the year 2000 he had lost his grip and prudence was being jettisoned in favour of complexity and obfuscation.

Look at this table of government expenditure:

Year of budgetGovt spendingChange on previous year
1998 £390.8bn +0.28%
1999 £395.4bn +1.43%
2000 £412.4bn +4.29%
2001 £432.8bn +4.95%
2002 £453.9bn +4.88%
2003 £477.4bn +5.18%
2004 £500.6bn +4.86%
2005 £523.4bn +4.59%

See how he was quite self-controlled until the year 2000. After that he really let rip. The above numbers, by the way, are in “2005 pounds”, ie, they are adjusted for inflation – the increases you see above are after inflation has been taken into account! The real increase in government spending between 1997 and 2005 was a massive 34%.

This raises some questions: how did Brown get away with spending so much money? What did he spend it on? And how did he avoid collapsing the UK economy with his profligacy?

The key to Brown’s tenure has been debt: public debt, private debt and hidden debt.

In those heady days back in 1997 when New Labour came to power they did something previous chancellors have said they should have done but never quite had the balls to do; they “set the Bank of England free”. Specifically, Brown and Blair handed over to the BoE the power to set interest rates. They established the Monetary Policy Committee (MPC) and charged it with controlling inflation in the UK economy. But even as they handed over the chalice, it was poisoned. They chose as their preferred measure of inflation the Consumer Price Index (CPI) which, crucially, did not include house prices in its basket of goods. Thus they planted the seeds of the house price bubble which has ripped through the economy since 1997. This bubble has been used by New Labour to fund an unprecedented profligacy. We shall see how.

First look at how much debt we are in.

Year of budget Total personal debt
including mortgages
Increase on previous Year
1997 £586bn ----
1998 £625bn +6.83%
1999 £675bn +8.00%
2000 £734bn +8.74%
2001 £810bn +10.35%
2002 £923bn +13.95%
2003 £1046bn +13.26%
2004 £1172bn +12.05%
2005 £1275bn +8.79%

As you can see, New Labour has presided over constantly rising personal debt, mainly in the form of mortgages, although credit card lending has also surged. Total personal debt now exceeds one and a half trillion pounds. And this was during a period of affluence and prosperity (supposedly) when you might have expected debt to be paid down, rather than to increase.

Now let us have a look at the flip side of debt: public debt, government borrowing, over the same period.

Year of budget Government borrowing in year
1997 £41.6bn
1998 £39.3bn
1999 £36.6bn
2000 £31.7bn
2001 £30.7bn
2002 £32.0bn
2003 £33.1bn
2004 £35.0bn
2005 £36.5bn

At you can see government debt has been a consistent theme of the Blair/Brown administration. Although the debt numbers don’t appear to be growing much, remember they are cumulative – we are still paying the interest on all previous years’ debt. Also note that Gordon Brown has proved a master of off-balance sheet borrowing. The published public debt figures do not include public-private partnership debt (PPP) or Private Finance Initiative (PFI) debt.

Gordon Brown likes to quote debt as a percentage of Gross Domestic Product (GDP) because this flatters the numbers. GDP is the total “value” of our economy; it’s how much wealth we created during the year. Since GDP appears to rise every year measuring debt as a percentage of GDP makes the debt look smaller. However GDP is also a complete crock of sh*t.

Let’s look at the GDP numbers while New Labour has been in power:

Year of buget GDP Increase over previous year
1997 £815.9bn ----
1998 £865.7bn +£48.8bn
1999 £911.9bn +£46.2bn
2000 £958.9bn +£47.0bn
2001 £1003.3bn +£44.4bn
2002 £1055.8bn +£52.5bn
2003 £1118.2bn +£62.4bn
2004 £1184.3bn +£66.1bn
2005 £1234.0bn +£49.7bn

There would appear to be some reasonably healthy growth in the economy there. However to see the “real” growth, the sustainable growth, we need to subtract off the debt. Growth through debt is just eating tomorrow’s harvest today. Brown would call it “investment in the future” but I prefer to think of it as spending what you haven’t got.

Let’s see what happens to the growth when we subtract off the public and private debt growth for each year.

Year of budget GDP “growth” Public debt Private debt Actual growth
1998 +£48.8bn -£39.3bn -£39bn -£29.5bn
1999 +£46.2bn -£36.6bn -£50bn -£40.4bn
2000 +£47.0bn -£31.7bn -£59bn -£43.7bn
2001 +£44.4bn -£30.7bn -£76bn -£63.3bn
2002 +£52.5bn -£32.0bn -£113bn -£92.5bn
2003 +£62.4bn -£33.1bn -£123bn -£93.7bn
2004 +£66.1bn -£35.0bn -£126bn -£94.9bn
2005 +£49.7bn -£36.5bn -£103bn -£89.8bn

Suddenly the numbers aren’t looking so good. One could argue about the methodology here, for example some of the debt may really have been “investment” which will return more in the future that it costs now, but the basic point is that since New Labour came to power we haven’t had a single year of true, non-debt-based, economic growth. Effectively we’ve been in recession all along – we just didn’t know it. And not surprisingly our total indebtedness as a country now stands in the trillions of pounds. This is why people feel poorer while the government claims they are richer.

(Another factor which I’m not going to cover in this post is immigration. Clearly what counts is not absolute GDP but rather GDP divided by the number of people. When the number of people in the country goes up, per capita GDP goes down. The country is richer but the people are poorer. No nationalist blog would be complete without an immigration rant, but that will be a treat for the future.)

Clearly if the public had been unwilling to take on new debt during the last ten years the country would simply have collapsed under the weight of government spending. The tax base would have been too small to support New Labour’s spending plans. But Brown and Blair knew what they had to do to ensure the public willingly donned the chains of debt slavery. The name of the game has been: house prices.

With house prices excluded from CPI the MPC had little choice but to regard inflation as considerably lower than it really is. They therefore kept interest rates far lower than the historical norm. In the current cycle interest rates bottomed out at 3.5% in 2003, whereas they would normally be around 8%-10% and indeed on “Black Wednesday” then chancellor Norman Lamont announced an interest rate of 15%. (However this interest rate never “applied” as it was cancelled later the same day and interest rates reverted to 8% on the Thursday.)

There is another way of calculating inflation. Rather than looking at the cost of a basket of goods you can simply take the growth in the money supply, M4 the broad money number, and subtract GDP growth. For example if GDP has grown 3% but M4 has grown 13% then inflation is 10% because there is 13% more money trying to buy 3% more goods. Using this technique inflation has been 10%-15% per year during New Labour’s administration.

In the last ten years the UK has been awash with cheap money. House buyers came to regard previously unthinkable debt levels as quite acceptable and the old three-times your salary rule for mortgages fell by the wayside (although it’s back with a vengeance now) and multiples of up to 10 times salary have been achievable.

This flood of borrowed money has found its way, to some extent, into the British economy and kept it afloat when; quite frankly, it would otherwise long since have sunk. Although the house buyer who borrows the large sum to buy his house doesn’t directly insert that money into the economy, every house purchase chain has two ends and at the “selling but not buying” end money sprays into all sorts of purchases: cars, holidays, plasma-screen TVs – you name it.

In addition home owners have been increasing their mortgages to spend on consumption, even when they are not moving house. Let’s look at a table of Home Equity Withdrawal (HEW). This is increasing your mortgage when not moving house just to spend the amount you have “gained” due to house price inflation.

Year of budget HEW
1997 -£0.57bn
1998 +£0.44bn
1999 +£10.15bn
2000 +£12.14bn
2001 +£21.05bn
2002 +£39.74bn
2003 +£57.33bn
2004 +36.47bn
2005 +£37.60bn
2006 +£48.55bn

It’s interesting to note that the interest rate trough in 2003 triggered the highest ever equity withdrawal. In the main this money has been injected into the UK economy – spent on the High Street in the vernacular. Clearly some has been used to buy other property, buy-to-let in the UK and holiday homes abroad. The borrowers may have thought they were spending their “gains” prudently by investing in other bricks and mortar. However, now we are into a period of falling house prices worldwide this will appear less prudent with the benefit of hindsight.

Anyway, it time to get back to the questions asked at the top of this post. Why have Brown and Blair presided over this enormous debt bubble? What’s in it for them?

The answer can be found in something called the “New Labour Project”. When New Labour came to power in 1997 they set themselves the straight forward objective of staying in power, for as long as possible, by any means necessary. In the main New Labour MPs were non-entities before they achieved power, and will revert to being non-entities when they lose power. Few of them have ever held what most of us would consider “a proper job”. Now is their time in the sun, and it must not be allowed to end – whatever the cost in future damage to the country.

The “project” requires the creation of a “payroll” vote. In the past the payroll vote has referred to members of parliament who have a government job, ministers and the like, whose loyalty can be counted on because they are being paid. The “project” has established a new payroll vote. New Labour has increased public sector employment by 500,000 jobs during its decade in office.

In the NHS we now have more managers than beds. Elsewhere we have diversity advisors, we have social inclusion advisors, we have access to the countryside advisors, we have public servants whose job it is to help us eat five portions of fruit and vegetables a day. These people are the new payroll voters. Only under New Labour do their jobs exist. Note the degree of cynicism in New Labour here. It would have been possible, and publicly applauded, to increase the number of doctors, nurses, teachers, police officers and soldiers. However the numbers employed in these professions have remained largely static. Instead recruitment has focussed on the essentially useless. The reason for this is self-evident. The professionals, nurses, teachers, etc, have private sector employment options, and in any event a change of government is unlikely to result in job loses for them. Diversity advisors on the other hand have no choice but to vote Labour. A government of a different complexion would fire them to save money and they have no private sector options. In short, their votes have been bought and paid for.

In order to finance this payroll army, New Labour has required a tax base stoked up artificially. Government spending increases have been layered on public and private indebtedness. In short, New Labour has purchased their present by mortgaging your future.


Anonymous said...

This was a fascinating read, thank you very much, I will be forwarding it to as many people as I can.



Anonymous said...

Good post - impossible to argue against but you ought to mention that its the bankers who really control the economy. They can do nasty things if Chancellor's don't toe the line.

Every generation, the international bankers create an artificial boom by the wild lending of money they have created from thin air, and then they pull the plug by contracting the money supply causing a collapse in the economy. After which they buy up all the assets at a fraction of their true worth.

Check out 'The Money Masters' on google video for an explanation of the fraudenlent nature of the banking system.

The situation in the USA is far worse, or at least its unravelling quicker. This week the Telegraph reported that you can buy a property in Detroit for $100 (NOT A TYPO) and they say the worst has yet to come. The recent sub-prime problem is caused by people who never were credit worthy enough in the first place to buy a house but now its widening to include those who have secure jobs but were tempted into taking out a second mortgage.

I find it interesting that the government could not find a private sector buyer for Northern Rock despite the fact that our banks have reported reasonably healthy profit figures allowing for the hit they took on the sub-prime. This is a sure indication that the international bankers are pulling the plug on the Western economies.

Over a year ago, I heard a claim that the Bank of England had been secretly privatised by Thatcher. This claim must be true. How else to explain the reported fact that the nationalisation of NR has 'temporarily' increased the PSBR from 40% to 44% if the government was not borrowing money from the Bank of England (now in the hands of the international bankers)to pump into NR.

I also came across a claim on a blog that the US government debts allowing for the massaging of figures, now stand at $400,000 per US citizen.

I don't know enough to assess the veracity of this claim but the dollar has been going only one way for a long time now.