PENSIONSANDSAVINGS.COM

It is simply incredible to deny that the Labour Government spent too much

Failure to recognise or admit past over-spending is deeply worrying

This is an article I wrote in 2006, exposing the excessive Government spending under Gordon Brown. It was clear to me even back then, and is still clear now, that the Government was spending far too much. I warned that this was the wrong policy, but it continued.   Ed Balls and Ed Milliband were in charge alongside Gordon Brown at that time, presiding over this huge rise in public sector spending. The ONS figures in my article showed the spending was on consumption, not investment.  Please look at the table, which highlights the enormous increases in Government spending that occurred from 1999 onwards. It is astonishing that Ed Milliband refuses to admit or accept these mistakes.

The Government was spending far more money than the country could afford and continued doing so, despite good growth in the economy.  I warned that this was dangerously short-sighted, especially in view of the aging population which meant we needed to be saving more, not increasing borrowing.

The Labour Government did not understand how to control spending taxpayers’ money.  Taxpayers were working hard, paying their taxes and trusting the Government to spend that money wisely, yet unfortunately, despite constant talk of being ‘prudent’ and ending ‘boom and bust’, Labour actually spent far too much, not on investing in our future but on increasing public sector employment and pay and expanding tax credits, rather than trying to ensure a thriving private sector to boost growth.  With such enormous debts having been built up, it is vital that the private sector creates growth and employment to help repay past overspending.  The arguments that we have to end ‘austerity’ seem to suggest that we are living in a world where the ‘deficit problem’ is solved and hard-working taxpayers can support ongoing rises in spending despite the massive national debts that were left in 2010.  This is just not true.

The ONS stopped producing the Government consumption series after 2004, but excessive Government spending continued right up to the financial crisis, which left us without any reserves of taxpayers’ money to deal with the economic downturn that ensued.  Labour handed over in 2010 saying ‘there is no money’ – if only they had been more prudent, as they promised to be.  The same people who were in charge at the time are promising the same again, they seem to have learned little since then.  It is worrying that Ed Milliband has refused to admit Labour spent too much.  Furthermore, in 2012, he praised the Socialist policies in France which promised to increase taxes and Government spending.  Those policies have left the French economy with massive unemployment and negative growth.

By contrast, the UK economy has had good growth and a huge fall in unemployment, driving better prospects for the vast majority of British citizens.  It is a slow process to recover from such a major crisis, while also trying to deal with past debts, but the Government since 2010 has steered a path to ensure job creation is a priority while also being careful with public spending.  That’s not easy and they won’t always get it right, but it is vital to have that aim.  The millions in the middle, who want to work, also want to know the Government won’t be imprudent with their money again.

We need to face the truth.  I have voted Labour in the past many times, but I truly believe that the risk of putting Labour and the SNP in charge of our public finances will mean more borrowing that our children will have to repay and more spending in Scotland at the expense of England, Wales and Northern Ireland.  If the past over-spending is denied, then what will stop the same thing happening again?  To suggest that we can ignore the public sector debt and once again go back to spending money we don’t have is an illusion.

I do hope that the ordinary, sensible members of the British public will see the dangers and not take that risk.  The country is at a cross-roads, it’s time to decide whether we continue with policies that are trying to ensure job creation and private sector revival, or return to the old days of tax and spend to excess.  We shall have to see what the people decide.

Here is the article I wrote in 2006, please have a look at it and especially the figures for Government spending:

Demographic dangers for growth – Brown has been imprudent

Sunday Telegraph, Economic Agenda Column, published 27^th August 2006. Edited highlights

full article link here: http://www.telegraph.co.uk/finance/2946231/Economic-Agenda-Why-Brown-has-been-imprudent.html

The UK economy has performed impressively for an extended period of time and the Treasury has received praise for this achievement.  There has been much debate about the underlying causes of this sustained growth and whether it really is evidence of prudent economic management, but one factor which has not been greatly explored is the contribution of demography.  In fact, the economic effects of demographic trends are worth more serious consideration.

During the 1980’s and 1990’s, the economy benefited from a significant rise in the number of people of working age.  At the same time, the birth rate fell sharply so there were fewer children to support.  In addition, the number of pensioners has been relatively stable.  The fall in number of dependents and rising numbers of workers helped sustain consumption and bolster growth, giving a very favourable underpinning to economic performance.

This demographic boost, however, is soon set to unwind.  From 2010 or so, the number of pensioners will increase sharply, while the number of workers falls, so the proportion of the population in employment is forecast to decline.  As more people try to live on pension income, rather than earnings, consumption is likely to fall and the burdens on working taxpayers will rise.  Thus, the slowdown in the growth of the workforce and the increase in spending on age-related support, mean demographic trends will have adverse effects on economic growth after 2010.

These changes pose many economic challenges.  Of course, the trends have been in place for many years.  So has the Government been taking advantage of these ‘good years’ to lay the foundations of a meaningful response to dealing with the sudden rise in old-age dependency, thereby minimising the negative impact of the ‘demographic drag’?  Sadly, it seems to have squandered this opportunity.

Our pension system is not well structured for the demographic challenges, has the Government perhaps been preparing the economy in other ways for this looming problem?  For example, has the fiscal situation been reined in, building up surpluses to prepare for the forthcoming strains on public spending?  Sadly not.  Even though taxation has increased, public spending has increased even faster, so the budget deficit has worsened.

GDP GROWTH AT MARKET PRICES 1993-2004

Year	Total GDP Mkt Prices y/y % change	Central Gov Consumption   y/y % change	Local Gov Consumption   y/y % change	Household Consumption   y/y % change
1993	5.0	3.8	-1.9	5.8
1994	6.0	3.1	3.7	5.0
1995	5.7	2.9	4.4	5.1
1996	6.3	5.1	2.2	7.2
1997	6.0	1.5	0.9	6.0
1998	6.1	3.5	4.6	6.6
1999	5.3	6.6	11.3	6.3
2000	5.1	7.0	7.7	5.8
2001	4.6	7.2	6.6	5.3
2002	5.2	9.7	8.4	5.1
2003	5.9	9.4	9.6	4.9
2004	6.0	6.8	9.2	5.1

 

Source:  UK Input Output Analysis, ONS

 

Since 1997, the contribution to economic growth from both central and local government spending has risen enormously, while gross fixed capital formation and savings levels have declined.  Local and central government consumption spending rose sharply after 1998, outstripping total GDP growth every year by a substantial margin (see Table ).

Since 2000, over half the new jobs created have been in the public sector and the long-term pension spending commitments from unfunded public sector schemes are also enormous.

A strongly expanding public sector, with sharp rises in public (and private sector) borrowing has sustained economic activity until now.  Yet, the forthcoming demographic shift would suggest that we actually needed increased saving, not increased borrowing, to prepare for future needs.

From around 2010 there will be increasing numbers of people not working, an increasing proportion of the population who are not economically productive, fewer workers to create new wealth and a sharp rise in the numbers of pensioners struggling to manage on the inadequate level of UK state pensions and dwindling private pensions.  As a larger proportion of the population has lower incomes, consumption is likely to fall, and growth will suffer.

During years when the economy should have been building up national savings to prepare for the forthcoming demographic drag, the Government has actually presided over a sharp drop in saving and huge rises in borrowing. Economic policy has focused on sustaining growth in the short-term, by spending and borrowing, and has squandered the demographic boost that should have enabled more saving to prepare for the ageing population.  Far from prudent management, this suggests a short-sighted agenda of going for growth now and leaving the next administration to cope with the consequences of demographic inevitability.

Dr. Ros Altmann

August 2006

ENDS