The Economic legacy of Brown’s government

From the moment Tony Blair was elected in 1997, it seemed inevitable that Gordon Brown would become Prime Minister. He took over from Blair in 2007 after the latter announced that he would resign his post within a year, during a conference in September 2006. This was due to internal pressure within the Labour Party, as tensions over issues such as the Iraq war were associated with Blair and thus began to hinder the party’s electability. In the 2005 general election, this came to be evident as Labour lost 48 seats, winning just 35% of the popular vote. Brown’s tenure has come to be defined by his response to the Great Financial crisis in 2008, with his premiership lasting just under three years.

Taxation

Chancellor Darling of the Brown administration delivered his first budget in March 2008, as the Financial Crisis began to unfold. One of his most notable policies was the abolition of the 10% income tax bracket. This disproportionality hurt low-income citizens the most, as income above the personal allowance and below the higher rate was now taxed at 20%. If it hadn’t been for the basic rate tax cut, this policy would’ve slowed the long term recovery from the Great Recession, as it would’ve greatly reduced aggregate demand given that all civilians would’ve had less money to spend.

Luckily, the basic income tax rate was cut from 22 to 20%, leaving more taxpayers better off. In this way, Darling ensured that taxpayers had more money in their pockets, boosting economic growth. This is especially as higher-income earners tend to invest money in long term projects, thus increasing prosperity across the board. However, these effects weren’t witnessed due to the Financial Crisis that later unfolded.

In 2009, Darling introduced the 50% tax bracket for all earners over £150,000. This was a terrible move that slowed the recovery from the Great Financial Crisis, as it left wealthier individuals with less capital. As richer individuals are one of the main sources of investment in our economy, this resulted in fewer jobs and slower economic growth due to the reduced investment into our economy that followed.

Darling further slowed the recovery from the Great Recession through his adjustments to the personal allowance. Under the new reforms, the Personal Allowance reduced by £1 for every £2 earned above £100,000, creating a marginal tax bracket of 60%. As with the income tax increases on higher earners, this policy also negatively impacted economic growth and prosperity due to its harmful effects on investment into the economy.

Spending

Brown’s government had to undertake many difficult decisions to grapple with the immediate aftermath of the Great Financial Crisis. Darling enacted a series of bailout packages during 2008 and 2009. The first of which totalled £500 billion and was announced in October 2008. Due to major falls in the FTSE 100 during the previous two months, questions over the safety and stability of the British Banks inevitably arose. Thus, the plan intended to restore confidence in the financial institutions, with the government purchasing shares in some banks, including RBS, HBOS and Lloyds TSB. Most of these shares have now been sold at a higher price, thus being profitable for the taxpayer.

The Bank of England’s made £200 billion available for short-term borrowing as part of their Special Liquidity Scheme. The government-backed banks in their move to boost their market capitalisation as they tried to boost consumer trust in banks. Finally, the government underwrote any qualified loans between British banks for some time, providing a loan guarantee worth roughly £250 billion. However, only £400 billion of this was new stimulus, as short-term loans worth £100 billion were already in place. This rescue package did initially appear successful at restoring confidence in the sector, exemplified by the FTSE 100 closing 8% higher in October 2008 after these stimulus measures were announced. A second stimulus was announced in 2009, albeit not as large as the previous one. This provided £50 billion to large corporate borrowers, as well as an undisclosed amount as insurance against large losses by banks.

The accumulating costs of all these bailouts led to the budget deficit reaching 10% of GDP in 2010 – a figure that hadn’t been witnessed since the 1940s. Whilst the bailouts have in some cases proved profitable, the excessive banking regulations that accompanied the bailouts has proved a disaster. Banks engage in no less risky activities nowadays than in the years leading up to the crisis. Banks are now more leveraged than they were in the run-up to the Great Financial Crisis of 2008 when market-value leverage ratios were just over 7% – they are now at under 4%. Regulations have created more barriers to entry, reducing competition in the industry and rendering more institutions ‘too big to fail.’ The lack of new competitors in the industry inevitably reduces innovation and consumer quality in the long run.

Despite being regarded by historians as a successful chancellor under Tony Blair, his legacy as Prime minister hasn’t warranted much such praise. With Alistair Darling as chancellor, his government presided over the largest budget deficits as a percentage of GDP since WW2, as the administration grappled with the effects of the Financial Crisis and the subsequent Great Recession. The banking regulations that followed this crash have been a cause for concern, with banks more leveraged than before, making it likely that a future financial crisis will be bigger than the last.