Howard Flight: It's time to tell the blunt truth about how we can recover from Labour's economic mess

Howard Flight is a former Shadow Chief Secretary to the Treasury and chairman of Flight & Partners Recovery Fund.  He is the author of the recent Centre for Policy Studies publication, From Boom to Bust: a plain guide to the causes and implications of the banking crisis.

After the 2001 General Election, when I perceived Gordon Brown’s economic and public spending policies as serious bad news, I was advised that there was nothing to be gained, politically, by being perceived as a “prophet of doom”.  Sadly, I suspect that no matter how strong the Conservative economic warnings might have been, Brown would still have succeeded in conning the electorate that he was a good manager of the economy.  It was essentially on this territory that Labour won a large, if reduced, majority in the 2005 General Election – where they were 23% ahead on the issue of who was the better manager of the economy.

We are now faced with a different but equally difficult dilemma.  Brown has recovered some credibility on his extraordinary proposition that he is the better option to manage the economic mess which is substantially of his own creation, where this territory is likely to be the main General Election issue.  Understandably, the Conservative leadership is again cautious of being perceived as the “prophets of economic doom”; but where I believe the position is now very different from the past, is that citizens know we are in a mess.  Not surprisingly, they are supportive of whatever Government policies might work to alleviate the sharp recession which is now upon us, where it is correct for the Conservatives to support what is helpful and to put forward our own positive proposals.  But in my judgment, we should also be telling people the painful truth about both why we are in such a mess and what will need to happen to restore economic prosperity.

First of all, we must not let Brown get away with blaming the US, the world economy or irresponsible banks.  We are in a particularly bad position because of Brown’s seven years of mismanagement as Chancellor.  He allowed both personal debt to rise too much – from 60% to 100% of national income - as well as Government debt, which if all the off balance sheet liabilities are included, is now also well over 100% of national income.  It was also a typical Labour error to increase the proportion of national income spent by the public sector from 37% to 43%.  This produced little or no increase in real output, but took away resources from the private sector needed to grow the real economy in order to increase the real earnings of citizens.  As a result, average household disposable income (after taxes) scarcely rose over the last 6 years, in contrast to the previous decade when public spending was held in check.  This then led citizens to increase their borrowings to unsustainable levels in order to increase their consumption. 

Brown created a toxic combination of unsustainable levels of personal borrowing, excessive and ineffective growth in public expenditure, rising public sector debt and stagnating household earnings.  During a decade of low inflation public expenditure ballooned from £375bn to £635bn p.a. (and still rising).  Brown’s tenure as Chancellor did unconscionable damage to the UK’s public finances and has undermined both the nation’s balance sheet and our longer term ability to cover our costs.  If this persists for long, we will face national insolvency with an inevitable loss of confidence in Sterling.

Looking to the future, the aggregate tax take is likely to be down by some £100bn p.a. for the next few years.  Tax revenues from the financial services sector, together with the direct and indirect taxes from those working within it, are likely to be down in aggregate by some £50bn; and as the result of rising unemployment, falling company profits, increased company failures and lower consumption, corporate and income tax and VAT revenues are also likely to be down by at least £50bn p.a.  In the near term in recession, higher Government borrowing is unavoidable and should be financeable; but a public sector deficit of £100bn or more p.a. is not financeable or sustainable for long, where Sterling’s recent precipitous fall is a warning.

The next Government will have to make major reforms to, and reductions in, public expenditure once the economy starts to recover. Here, the biggest area where public spending has exploded over the last 8 years has been welfare expenditure, which has   risen to £170bn p.a. - before adding back the accounting gerrymandering by which Brown has treated tax credits as a net-off from tax  revenues rather than as additional spending.  The country simply cannot afford the extent of the welfare dependency transfers which Labour has added over the last 8 years.

When I was studying economics at school I asked my teacher why pay in the public sector was lower than in the private sector.  The reply I was given was that people had better security of employment in the public sector and better pensions.  Under Labour, however, level for level, pay is now some 23% higher in the public sector than the private sector, where security of employment and pensions remain significantly better than in the private sector, and when there are nearly one million more public sector employees.  This imbalance will need to be corrected.

Inevitably the Left will call for higher taxation on the better off.  But the additional tax revenues this could generate would in no way finance the increase in the public sector deficit; more fundamentally, in a global world, this would serve to drive global businesses and wealth creators elsewhere.

The next Government will need to give priority to re-building a more productive, wealth-creating economy, which is the only basis for sustainable increases in the standard of living.  Over the next 2 years living standards will fall and will not be able to increase until real economic growth is restored.

The Brown Government has been overtaken by economic events and has been grasping at straws to try to keep the economy afloat in the immediate term.  But it has markedly failed to face up to the realities of its own years of economic mismanagement and what will be needed to re-build prosperity out of the recession it has largely created.

The Conservatives have rightly stood firm against unsustainable increases in the budget deficit, beyond the increases that will occur anyway.  I believe the time is coming for the Conservative leadership to tell people the blunt truths about what will be needed, both to recover from the economic mess and mountain of debt which Labour has created and to achieve economic revival over the next 5 years – and that, unavoidably, this is going to be tough.