Labour overspending did not trigger financial crash, says senior civil servant
Permanent secretary to Treasury, Sir Nicholas Macpherson, contradicts
Tory pre-election claims, saying financial crisis was ‘a banking crisis
pure and simple’
The then PM, Gordon Brown, and his chancellor, Alistair Darling, during Labour’s 2010 general election campaign.
Photograph: Martin Argles for the Guardian
The permanent secretary to the Treasury, Sir Nicholas Macpherson, has
argued that the 2008 financial crisis was “a banking crisis pure and
simple”, contradicting Conservative claims that it was caused by Labour overspending.
His remarks emerged after Ed Miliband came under pressure on the
leader’s Question Time on BBC1 on Thursday, facing accusations that
Labour government had overspent, a view strengthened by the now
notorious letter left by the former Treasury chief secretary Liam Byrne
to his successor in 2010 that there was “no money left”.
In a largely challenging review of Mr Osborne’s Economic Experiment,
a book by the Observer economics columnist William Keegan, Macpherson
wrote in March before the campaign started: “Some of Keegan’s book
resonates. The 2008 crisis was a banking crisis pure and simple.
Excessive risk had built up in the system; the regulators failed to
appreciate the scale of that risk or to address it.
“As he puts it, it was ‘a failure of the Group of Seven economic
policymaking establishment’, myself included. Inevitably, countries with
bigger banking sectors, notably the UK, were worse affected.”
Miliband has always insisted that the banking crisis caused the
deficit, not the other way round, but admits that the last Labour
government did not do enough to reform the banks.
But the Tories have put economic credibility at the heart of
their election campaign after polls showing a significant proportion of
the public hold the last Labour government responsible for the 2008
economic crisis and trust coalition ministers more with the economy than
Miliband.
The review, in the publication Civil Service Quarterly, continues:
“But in one sense it doesn’t matter what caused public borrowing to blow
out in 2008-09. Given that the financial service industry was not going
to return to its previous size and shape, the government had to face up
to the increasing mismatch between tax and spending.
“You cannot run a deficit of 10% of GDP for any length of time in a
world where there is little or no inflation. Alistair Darling [the
former Labour chancellor] recognised this in 2009-10. And George
Osborne, David Laws and Danny Alexander chose to take fiscal tightening
further in the summer of 2010.”
Macpherson does not accept the claims that the crisis in 2010 put
Britain in the exact same economic boat as Greece – another claim made
repeatedly by the Conservatives.
He writes: “Keegan is right to point out that the UK is not Greece.
It has much stronger institutions and – most important of all – a
floating exchange rate. But the longer a government runs a large
deficit, the greater the risk that it hits an inflection point where the
markets take fright, and the cost of funding rises sharply: in this
respect the eurozone experience is relevant.
“The problem for policymakers is that ex ante it is difficult to know
where the inflection point is, and that strengthens the case for erring
on the side of caution. That’s why the last government set a debt rule
of 40% of GDP and the current one is seeking to get debt on a downward
path.”
The independent Office for Budget Responsibility,
in its main assessment of the causes of the crisis written in September
last year, has taken a more nuanced view. It argues overspending did
not cause the deficit or the banking crisis, but that the UK government
was less well prepared for the crisis due to a consistently over
optimistic view of the revenues the Treasury was likely to receive from
2003 onwards.
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The
OBR writes: “Looking back to the pre-crisis period, it is hard to argue
that the tax and spending policies implemented in the early and
mid-2000s were in themselves an important cause of the crisis, or the
recession.”
The OBR adds that the forecasters outside the Treasury were
consistently and rightly more pessimistic about the fiscal outlook than
the government. Public sector net debt was increasing significantly
during a period when it was being greatly reduced in most other
industrialised countries.
In one major speech, Macpherson said: “In my view, there will always
be inflection points where a further increase in borrowing will result
in a much bigger increase in funding costs as a number of eurozone
countries have found to their cost. Ex ante, it is difficult to know
where these inflection points are, which makes the case for erring on
the side of caution.”
copy http://www.theguardian.com/business
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