The Economic legacy of the Blair administration

Tony Blair became Prime Minister in 1997. This came after a landslide election victory in which the Labour Party gained 145 seats, taking them to a total of 418 seats. With a majority of 179 seats, the Labour government held the largest parliamentary majority since 1935. The transformation of the Labour Party into ‘New Labour’ greatly contributed to the election victory, with Tony Blair adopting a ‘centrist’ platform to attract disillusioned Conservative voters. Tony Blair inherited a strong economy when taking office – a result of the economic policies of the preceding two administrations. With this said, the national debt ballooned over his tenure despite the absence of an economic crisis. The reasons for this are poor economic mismanagement, largely attributable to his chancellor Gordon Brown. Excessive government spending alongside tax-hikes created the pre-conditions that led to the Global Recession of 2008 hitting the British economy harder than most.

Taxation

Initially, the Blair administration’s record on taxation proved successful, especially regarding income tax. In the 1997 election campaign, New Labour campaigned on not raising income taxes on any group – a departure from traditional Labour Party policy. This resulted in the Labour administration not raising the basic rate of tax under their tenure, keeping it at around the 20% rate that successive Conservative governments had reduced it to. This decision promoted economic growth, as increasing taxes would’ve cut into disposable income, thereby reducing aggregate demand. Smaller demand within an economy would’ve increased the chance of recession due to lower businesses revenues, putting workers out of jobs and worsening living standards. Instead what occurred during the start of the 2000s, as had been the case in the previous two decades, was growing economic growth with GDP growing 3.4% in 2000.

However, GDP growth fell as the decade progressed, with GDP growth under the Labour government never quite reaching the 5.4% high of 1988 under Thatcher, nor the 3.8% high of 1997 under John Major. Had Britain matched US levels of growth between 1997 and 2008, the UK’s GDP would have been £14 billion higher by 2006. One of the leading factors of this poor economic performance relative to previous administrations was the National Insurance tax increase of 2002. This tax increase of £40 billion over a five year period, greatly slowed economic growth for a plethora of reasons. As National Insurance applies to both businesses and employees, the tax acts as a ‘business tax’ as employers are forced to contribute more in tax. The result is slower wage growth for existing employees with a reduction in new hires due to increasing labour costs. Existing employees are also more likely to face longer hours following increases to National Insurance, as the possibility of fewer hires puts greater pressure on existing workers to achieve a higher output. At the same time, reduced business profits as a result of the increase to National Insurance led to decreased investment in PP&E and other factors of production besides labour that would’ve increased economic growth. Therefore, the slowing GDP growth experienced under New Labour is a result of the increase in the ‘job tax’ that is National Insurance, as businesses were forced to cut back on increases to their factors of production due to the higher labour costs that came with the tax increase.

Spending

Excessive levels of public spending under Labour exacerbated the effect of the Great Recession on the British economy. One such area in which government spending greatly increased was the NHS. Whilst NHS spending increases are popular politically, what followed was an increase in waste, inefficiency and bureaucracy within the health system. During Blair’s tenure, spending on the NHS increased by an average of 6% annually. With this said, the NHS had fewer doctors, nurses, hospital beds, CT and MRI scanners per capita than the likes of Japan and Hong Kong in 2007, despite spending more money per capita on healthcare. This is a result of the growth in middle management that occurred in the NHS under the Labour government. In 2013, even after reductions in the number of bureaucrats and managers within the NHS, administrative roles still comprised 20% of the NHS workforce in England in 2013. Such waste and inefficiency within the health service represent a catastrophic waste of tax-payer money. The money spent on increasing the number of bureaucrats within the NHS could’ve gone towards tax cuts that would’ve increased economic growth and prosperity. Therefore, it is unsurprising that in the NHS, productivity fell by 2% annually between 2001 and 2005.

At the same time, Blair’s chancellor Gordon Brown enacted large, wasteful spending increases across other departments. First of all, there were vast increases in education spending. Despite this, education standards relative to other developed nations fell significantly. In 2000, the average mean test score in the UK across maths, reading and the sciences were 528. By 2009, this had fallen to 500. By comparison, this figure rose from 489 to 510 in Germany over the same period. This represents educational mismanagement in the UK, with these increases in monetary contributions resulting in falling educational standards. In addition, spending on public transport more than doubled during Blair’s premiership. With this said, in 2007, the UK still had had fewer miles per motorway per car than all other major EU nations. Furthermore, the benefits and welfare system was overcomplicated by the introduction of tax credits, exacerbating the problem of the welfare trap. This is because of the eroding work incentives that these benefit over-complications brought, as seen by a 147% increase in the number of people who lost 60% or more of each gain in income due to taxes and lost benefits. As a result, more people became increasingly reliant on government assistance and benefits, making it so that benefit claimants were better off than some working households.

As a result of these excessive spending policies, the budget deficit reached over 10% of GDP in 2009 – greater than that of Greece, whose economic predicament post-financial crisis has been touted as one of the worst globally. The complete disregard for public finances under Labour forced the successive coalition government into making drastic spending reductions to restore investor confidence in the British economy. As the UK would have to borrow money to fund public expenditure, it needed to satisfy current and future bondholders by maintaining its economic credibility.

Ultimately, the Blair administration gave us the conditions that made the effects of the Great Recession worse on the British economy. Overblown public spending increases led to this, coupled with tax increases that slowed economic growth relative to previous administrations and other developed economies during the same period. Whilst New Labour promised change, the result was change for the worse rather than for the better.