Keith Marsden: Darling’s Dodgy Dossier

Keith Marsden is Fellow of the Centre for Policy Studies and previously an adviser at the World Bank and senior economist in the International Labour Organisation.

Gordon Brown often gave a false, selective or misleading picture of the performance of the British economy under his stewardship, and distorted the record of his predecessors. He also frequently failed to acknowledge the role played by a changing global environment in his successes (in reducing inflation, for example), or to give credit to policy reforms under the Tories (e.g in boosting the financial sector).

Alistair Darling is clearly following in Brown’s footsteps. In his Pre-Budget speech to the House of Commons on 8th October, he claimed that Britain is the fastest growing major economy in the world. Yet in its latest forecast, the OECD expects real GDP to grow at a 2.7% annual pace in the UK in 2007, the same as the averages for the Euro area and for all OECD member countries . Seventeen OECD members are expected to grow faster than Britain this year, and the IMF forecasts that total world GDP will expand at a 5.2% rate. So Britain’s growth is lagging behind many of its trading competitors.

Over the full decade of New Labour rule, the UK’s GDP expanded at an average annual rate of 2.8%, compared with 4.1% for the world’s output. If one takes the world’s twenty largest economies, measured by their Gross National Incomes expressed in purchasing power parity dollars, Britain ranked only equal 13th in the average rate of GDP growth over the period 1998-2007 . It was far outpaced by China (9.1%), India (6.6%) and Russia (5.4%) which are now the 2nd, 4th and 10th largest economies respectively.

Moreover, many newly-industrialising and developing economies grew faster than Britain over the last decade. The IMF has published average regional rates of 7.4% for Developing Asia, 4.7% for the Middle East, 4.3% for Africa, and 4.0% for Central and Eastern Europe. The Western Hemisphere countries as a whole grew at the same pace as Britain.

During the last decade of Tory governance, the UK’s real GDP had expanded at a 2.2% average annual rate, reflecting a less buoyant global economy (3.4% annual growth). But households and consumers fared better during this period than in subsequent years. Real household disposable income per head went up at an average annual rate of 2.9% from 1988-1997, but its growth slackened to average rate of 2.1% from 1998 onwards . Household disposable income per head measures what people can spend, after paying taxes, on goods and services of their own free choice, and priced in competitive markets. I n recent years, a growing proportion of total income has been commandeered by the government (in the form of taxes) to pay for public services which consumers may or may not want. And the estimated value-added produced by government services is inflated by high rates of salary increases in the public sector, and the absence of competition. Rapidly expanding (and largely unaccountable) public services make GDP growth rates an unreliable guide to improvements in real living standards. 

On government borrowing, the Chancellor compares a level of 2.7% of GDP this year with a peak of almost 8% in 1993. He didn’t mention that it had been in surplus at the end of Margaret Thatcher’s premiership, and that Kenneth Clark had brought it down to 3.5% in 1996-97, just half a percentage point above the average over the last four years.

Discussing public investment, he said that “in the past we paid a heavy price as a country or failing to invest when it was necessary”. He probably didn’t intend to criticize his boss and predecessor Gordon Brown. But the Red Book shows that public net investment averaged less than 0.6% of GDP during the first four years of New Labour government, and at 1.8% in 2005-06 is still well below the 5-6% levels reached in the 1970s.

Alistair Darling boasts about record levels of employment. This sounds more impressive than it is. The absolute number of economically active persons grows in most countries as labour forces expand from natural population growth and immigration. The UK population has increased by over 2 million over the last decade , including many immigrants of working age. A more significant figure is therefore the economic activity rate for people of working age. This reached a peak of 80.7% in 1990. It was 78.8% in the second quarter of 2007. 

On this evidence, voters shouldn’t take the claims of the new Chancellor on their face value.