BLAIR’S BRITAIN, 1997–2007
Page 31
take many years to work out in full. This is especially true of government
decisions that influence the supply side of the economy. Add to this the
fact that figures we have for many of the key economic variables are measured with error and subject to regular revision. So the economic record
for a recent period that we have to hand now may be seriously inaccurate,
distorted by a host of other factors, and barely affected by what governments did or did not do within that interval.
Politicians claim credit when things go well. They seek scapegoats to
exculpate themselves when they do not. So their own statements, and the
briefings and announcements of their news managers, may give no sound
basis for judgement. (Nor can we trust opposition parties, given their role
to paint a picture in the bleakest hues.) There is a further problem, too.
Government has many heads. The formal constitutional position may be
clear (although often it is not). But how are we to assign responsibility for
an outcome between the relevant minister(s), the prime minister, their
various political advisers, the civil service, and other bodies to which
decisions may have been delegated? And most pertinently of all, how
much of the applause – or brickbats – we may feel confident enough, at
this early stage, to apportion among the politicians in charge, can we pass
to Tony Blair, as opposed to Gordon Brown?
The macro-economic record
We should begin with the evidence. The decade from May 1997 has seen
ten years of continuous and reasonably steady economic growth.
Unemployment has mostly edged downwards, to levels far below those
seen in the previous twenty years. Inflation has been modest and steady,
far lower and less turbulent than in the 1970s or 1980s. Interest rates have
generally fallen, whether real or nominal, long or short. The stock market
has trended up (although with some sharp swings). Sterling has climbed
relative to most of the world’s currencies, above all the US dollar and the
continental currencies that metamorphosed into the euro. Most of
Britain’s income groups have witnessed large rises in living standards.
Except at the edges of the distribution, most of these ten years saw
declines in inequality and poverty by most definitions. Private consumption spending has been particularly robust.
This summary of the evidence is distinctly positive. But it needs to be
seen in perspective. For most variables of interest, the contrast with
Britain’s experience in the quarter-century to 1997 is especially impressive. But the comparison with the 1950s and 1960s, which the Blair years
so resemble in many respects, is less so. Those earlier decades displayed
somewhat faster than average inflation but markedly lower average
unemployment than the Blair decade. And the ‘bad’ years 1972–97
present a very uneven picture, with a much stronger performance in most
respects towards the end than earlier on. The five years 1992–7 are very
much more like the Blair years than what preceded them; and as we shall
see later, this may well be no accident.
Furthermore, one important economic variable, perhaps the most
important of all, registered barely any change at all after 1997. This is the
trend rate of economic growth. The trend in real gross domestic product
per head has remained almost constant since the late 1940s in the UK. It
has remained rock solid at about 2.4% per year.1 And to complicate
matters further, there are several other leading countries that displayed
the same combination of steadier growth and flat (or gently decelerating)
inflation and unemployment, as Britain.
11 See W. Allen, R. Batley, E. Baroudy, B. Paulson and P. Sinclair, Growth in Britain
(University of Birmingham, mimeo, 2007).
Table 10.1. Growth and inflation in the big six OECD economies
Annual average
Annual
Annual average
Annual
growth rate,
average
inflation,
average
1997–2007
growth rate,
1997–2007
inflation,
1992–7
1992–7
UK
2.7
3.1
1.7
2.2
Unweighted
1.85
1.74
1.46
2.4
average of
next five
France
2.2
1.1
1.7
1.8
Germany
1.5
1.3
1.5
2.3
Italy
1.4
1.3
2.3
4.4
Japan
1.2
1.5
Ϫ0.8
0.8
United States
2.9
3.5
2.6
2.7
Source: IMF, World Economic Outlook and author’s calculations and forecasts.
Britain has done very well when compared with the world’s five other
largest economies. While quite similar in other respects, the United States
displays a slightly lower trend in real income per head, though faster in
aggregate; marked rises in inequality on most definitions; and a somewhat more disturbed series for aggregate output. Japan has hardly grown
since 1991. Its general absence of inflation – and spells of price declines –
are not seen, by the Japanese or by outsiders, as an achievement. Rather,
they are taken to be a major weakness that their authorities have sought
hard to combat. And what of Germany, France and Italy? Each of these
three has seen substantially slower average growth and much higher
unemployment in the Blair years.
Table 10.1 illustrates. Of the big six OECD economies, the United
States grew fastest from 1997 to 2007, as it had from 1992 to 1997. (Here
UK economic performance on Blair’s watch, which lasted for two and a
half parliaments, is contrasted with the previous parliament, 1992–7, and
with those of other major countries; and inflation is defined as the percentage annual average change in the country’s consumer price index.)
Britain came second in both periods. Actual growth was a little slower
under Blair than in the previous quinquennium. But part of this small
gap results from rounding, and the strong figure for 1992–7 includes a
cyclical bounce. Britain’s relative growth performance also appears to
have slipped across the two periods. The UK grew nearly 1.4% per year
Table 10.2. Unemployment in the big six OECD economies
Average
Change from
Average
Change from
unemployment
1997 to 2006
unemployment
1992 to 1997
rate, 1997–2006
rate, 1992–7
UK
5.5
Ϫ1.7
9.0
Ϫ2.7
7.3
Ϫ1.4
7.6
ϩ0.9
average of
next 5
France
9.7
Ϫ2.5
11.2
ϩ1.6
Germany
8.1
Ϫ0.5
7.3
ϩ2.8
Italy
9.2
Ϫ4.5
10.5
ϩ2.5
Japan
4.6
ϩ0.7
2.9
ϩ1.2
United States
4.9
Ϫ0.3
6.1
Ϫ2.6
Source: as Table 10.1.
faster than a simple average of the other five from 1992 to 1997. In Blair’s
decade, that gap dropped to 0.9%. Average annual consumer price inflation also slowed across the two periods, in absolute terms (1.7% against
2.2%). Japan’s much bigger swing, from inflation to deflation, places UK
inflation above the average of the rest in Blair’s years, while it had been
slightly below earlier.
Table 10.2 presents unemployment figures for these six economies.
Britain’s moved from a relatively high (but falling) figure in 1992–7 to relatively low, and still falling, under Blair. These excellent performances
result from the interplay of several factors. One was Brown’s welfare-towork policies.2 Earlier, sterling’s eviction from the European Exchange
Rate Mechanism (ERM) in September 1992, and the accompanying
depreciation and monetary policy loosening this permitted, were important in the mid-1990s. Perhaps the greatest influence, though, was the
lagged impact of the labour market and trade union law reforms enacted
by Thatcher. It was to Blair’s credit, and Brown’s, that political pressures
to repeal them were resisted. Had they succumbed, UK unemployment in
2007 might well have been closer to rates prevailing in France, Germany
12 Britain’s tax credit schemes expanded greatly in 2003–4, from foundations first laid in
1972 with the Family Income Supplement. The idea is to top up incomes for working families with low earnings, and not to reward inactivity. Six million families now receive tax
credits in Britain, so the scale is very large. But so too is the level of error and fraud: nearly
£2 billion has been officially described as irrecoverable overpayments.
and Italy, all of which had generally fought shy of applying Thatcherite
reforms.
Many of Europe’s smaller economies, on the other hand, reveal a considerably stronger record. Growth has been much faster in the Baltic
Republics, Finland, Ireland, Luxembourg, Norway and Spain than in
Britain, for example. And many witnessed sharper falls in unemployment, with much the same time profile of inflation as in the UK. Other
advanced countries outside Europe – Australia, Canada, Mexico, New
Zealand and South Korea, for example – have also grown at not dissimilar
rates to Britain’s in this period, and with broadly similar (or better)
records of inflation and/or unemployment. And Britain’s share of world
GDP, measured at current exchange rates, fell in the Blair years (as it
seems to have done in every decade since the mid-Victorian era). This
was mainly because of the exceptionally rapid growth of most Asian
economies, especially China and India. Partly because of these countries’
growing weight in the world aggregate, the long-term slide in the UK
share of world output might actually have gathered pace on Blair’s watch.
Some slide is really inevitable: over the long haul, all else being equal,
richer countries tend to grow significantly more slowly than poorer
ones.3
So much for longer-run averages. What of the short-run chronometry
of the Blair decade? These ten years display no periods of GDP decline, in
marked contrast to the previous quarter-century of UK data. There had
been serious recessions in 1973–5, 1979–82 and 1990–2, but not even
mild ones in 1997–2007. No ‘boom and bust’, agreed; but there was
unmistakably some undulation in growth. So Britain’s business cycle had
been squashed. But not abolished. It was in fact really quite like what it
had been in the 1950s and 1960s, if more muted. Annual growth peaked
at about 4% in 2000 and 2004, slipping to 2% or less in early 2002 and
mid-2005. Mild business cycle peaks (points where growth returns to
trend from above) can be identified in 1997–8, 2001 and 2005. At around
four years, the interval between the peaks is close to the fifty-four-month
periodicity detectable for 1951–73. The downswing from 2000 to 2002–3
is the sharpest cyclical phenomenon in the Blair decade. But it coincides
with, and doubtless betrays influence from, very much more pronounced
downswings in the GDP series in the United States, in world trade, and,
13 This ‘catch-up’ phenomenon is strongly attested in most cases. See G. Doppelhofer, R.
Miller and X. Sala-i-Martin, ‘Determinants of Long-Term Growth: A Bayesian Averaging
of Classical Estimates (Bace) Approach’, American Economic Review, 94, 2004: 813–35, for
a recent study that shows this (and much else).
above all, in each of the world’s principal stock markets; and it must have
been aggravated by the shock of the World Trade Center atrocity.
The verdict on this broadly satisfactory record is certainly positive.
Some credit for this must certainly go to Brown, and some, less directly,
also to Blair. The main achievement of the Blair–Brown partnership was
perhaps to have retained key features of Thatcher’s reforms (particularly
lower marginal income tax rates and restrictions on the rights of trades
unions) that allowed the macro-economic record to blossom. And the
fact that inequalities and poverty have tended to decline somewhat on
many definitions (although not all, nor consistently across the decade),
and not to worsen as they quite often tended to under Thatcher, will
partly reflect the impact of Brown’s measures to provide more support
for low-income families in work.
The euro
There are few issues of economic policy where we know Blair’s views
differed sharply from his Chancellor’s. On many they appear largely or
fully agreed: the need to avoid any increase in the top rate of income tax
or the standard rate of value added tax; the virtues of the private finance
initiative; the early acceptance of tight limits on public spending, and its
spectacular later relaxation on health expenditure; the sedulous courting
of business; the distancing from Labour’s traditional allies and founders,
the trades unions. But on one they differed sharply. This was the issue of
whether the UK should adopt the euro.
It will have been Blair’s hope, early on in his premiership, that Britain
would be able, at least at some point, to join Germany, France and her
other main European Union partners in the world’s first great currency
merger. But for Brown – who in the 1980s had been if anything less
Eurosceptic than Blair – that decision wa
s a Treasury-reserved domain.
The issue was kicked into touch during the first Blair parliament. ‘We
conclude that the determining factor as to whether Britain joins a single
currency is the national economic interest, and whether the economic
case for doing so is clear and unambiguous’, Brown told the House
of Commons on 27 October 1997.4 The Chancellor devised, and
announced, five tests,5 all related to aspects of potential benefit or harm
14 House of Commons Debates, cc. 583–4.
15 These concerned whether the UK had achieved convergence with Europe; whether it was
flexible enough to adapt to the change; how UK investment would be affected; the impact on
the UK’s financial services sector; and the prospects for employment and growth in Britain.
to Britain that euro adoption might entail. On the basis of the answers to
these, to be illuminated by detailed research conducted within and by the
Treasury, and which the Treasury would publish, Gordon Brown would
make a recommendation during a second Blair government to the
cabinet and parliament. A positive recommendation by Brown would
trigger votes in cabinet, then in parliament, and finally a national referendum. At any point in the chain, a negative one would bury the issue, at
least for a while.
Arguments in favour of euro adoption by Britain would include
several points. There would be some saving of her real resources devoted
to exchanging sterling and other euro-legacy or euro currencies. There
could well be a stimulus to trade6 with euro partners. And there would be
an elimination of exchange rate uncertainties associated with that trade.
(Given transactions costs, maintaining separate currencies is rather like
imposing a tax on trade with other countries, but an especially silly tax,
which, unlike tariffs on imports, does not even have the merit of raising
any appreciable revenue for government.)
Potential net welfare gains might come from heightened competition
in UK markets, as price comparisons between home and EU partner
firms’ products became less opaque. Gaps between interest rates facing
lenders and borrowers might narrow, as Britain’s financial markets
became more liquid. Each of the above might raise the UK’s long-term
growth rate, possibly even indefinitely.7 There could also be savings in
foreign exchange reserves and some consequent gain in net foreign
investment income; and opportunities to reap economies of scale in