New Labour’s Legacy

May 12, 2010

Over the thirteen years that the Labour Party governed Britain, real GDP rose some 2.0% per annum, but that pace improves to 2.9% per annum if one only counts the first 11 years and excludes last year’s decline of 4.9% and a rise of merely 0.5% in 2008.  Consumer price inflation averaged roughly 1.75% per annum, slightly less than the targeted 2.0% pace.  That too has deteriorated recently to 3.4% in the year to March. Sterling was valued at $1.6233 at the beginning of the Labour period of rule and closed the 13 years down 7.8% on net at $1.4965, having averaged $1.6840 for the whole period and posted a high marginally above $2.10 and a low of slightly less than $1.36.  Against the D-mark and its present euro-translated value, the pound lost 17.6% on balance but experienced an average value that was 1.4% stronger than the level the Labour Party inherited.  Three-month Libor rates were at 6.5% when Tony Blair become Prime Minister in May 1997, ranged between 7.9% and 0.5%, recorded an average value of 4.9%, and are presently at 0.70%.  Ten-year gilts had a yield of 7.41% when Labour took over, posted an average level of 4.83%, ranged roughly between 7.5% and 1.3% and closed below the period mean at 3.89%.

This record isn’t bad, but the legacy that’s being left for others to fix will be remembered less fondly.  Britain’s salad days were heavily reliant on the go-go financial services industry and an overly loose fiscal policy.  So when the Great Recession hit, Britain’s economy was particularly vulnerable.  The recession was deeper than many other countries had.  Britain’s budget deficit soared above 10% of GDP, and debt as a share of GDP experienced one of the sharpest upturns in the world.  Britain retains a substantial trade deficit, but the current account gap is manageable.  Inflation was lower than in the average advanced economy in the period as a whole, underscoring one of the two wisest policy decisions of the entire period, which was the transfer of interest rate policymaking from politicians to the central bank where such belongs.  Lately, however, inflation has been noticeably higher than in other G-7 economies.  The other good decision was to keep sterling out of the European Monetary Union.  Like much of Europe, Britain faces several more difficult years of austerity.  The Bank of England’s forecast of above-3% economic growth both next year and in 2012 seems far too optimistic.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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