Keith Marsden: Gordon Brown has not learnt from his past economic mistakes

Keith Marsden is a member of the Council of the Centre for Policy Studies and a former adviser at the World Bank and senior economist in the International Labour Organisation.

Following the G20 Summit, Gordon Brown has been posing as the saviour of the world economy. He claims to have master-minded an effective action plan to tackle the global recession. But he continues to deny any responsibility for Britain’s economic downturn. He blames it on the collapse of the U.S. sub-prime mortgage market, its repercussions on other financial activities and sectors in the U.S. and elsewhere, and the consequent contraction of world output and trade. He also refuses to admit the role played by Britain’s lightly-regulated banking sector in creating high-risk and little-understood financial instruments, and with his encouragement, purveying them around the world.

Independent data, and his own speeches, show that he was far from blameless. While Chancellor of the Exchequer, he failed to take action to prevent or restrain the bubbles that had formed in Britain’s housing market as early as 2004. In an op-ed article published by the Wall Street Journal Europe (“Gordon Brown’s Boom and Bust”, May 28th, 2004), I pointed out that house prices had risen by 55% in London, and by 40% in the UK as a whole, since 1997. These rises compared with increases in average earnings of just 10% and 12% respectively. These widening gaps were unsustainable, and must eventually be narrowed by a bursting of the house price bubble, or by a more rapid increase in nominal earnings. The latter would inevitably lead to a faster overall inflation rate, I suggested.

Writing in the Daily Mail on 26th July 2004, I also drew attention to an IMF study published in its World Economic Outlook, April 2004. This study of 14 countries found 20 cases of house price booms being followed by house price crashes since 1970. The median price contraction was 27% and the duration of the crash, from peak to trough, ranged from four to five years. Moreover, house price busts were associated with substantial output losses in the overall economy, averaging 8% of the level that would have prevailed with average GDP growth rates before the bust. Real private consumption and investment in machinery and construction were adversely affected.

Keith Marsden: Gordon Brown's Boom and Bust

Mr. Marsden, a fellow of the Centre for Policy Studies, was previously an adviser at the World Bank and senior economist in the International Labour Organisation.

Less than two years ago, Gordon Brown was riding high in the opinion polls. He was lauded by his Labour colleagues as the best Chancellor for 60 years. His boasts about his own performance were endorsed uncritically by much of the media .And his favourite slogan was “no more boom and bust”.

Today, his popularity among the public and the press is at record lows, and he faces a growing leadership challenge in his own party. The British economy is suffering from a meltdown in the financial and housing sectors, surging inflation, accelerating job losses and a looming recession. 

Was Britain’s success in the good times the result of Gordon Brown’s policies as Chancellor, or due more to a benign global environment? And is the current slowdown in Britain’s economy caused by external factors outside his control, as he maintains? Or did he fail to take decisive action to prevent bubbles forming in Britain’s financial and housing markets?

The IMF reports that the global economy was particularly buoyant over the last decade, until recently. Real world output expanded at an average annual rate of 4.4% from 1999-2008, up from 3.2% in 1989-98. Britain’s growth rate also increased from 2.0% to 2.7% over these two periods, but lagged behind the rates achieved by 17 out of 29 countries classified by the IMF as advanced economies.

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.