What was Tony Blair’s economic legacy? It seems odd to pose this question, even though last week marked 20 years since the former Prime Minister became Labour leader. After all, the man who pulled the UK’s economic policy levers during the ten years of Blair’s premiership from 1997 was most definitely Gordon Brown.
Blair’s Chancellor did everything in his power to control economic and financial issues. The turf war between them and the related political fall-out – the TBGBs – was the stuff of Westminster legend. But Blair’s impact on UK economic policy was still considerable, not only in terms of what he did but also what he didn’t do.
His major economic achievement was that, as Labour leader, Blair dragged his party, kicking and screaming, into the modern world. Before him, Labour acted as if it simply didn’t understand capitalism – and didn’t want to. Weighed down by statist ideology, and petrified of defying often crypto-Marxist trade union paymasters, Labour’s record in government was marred by sky-high borrowing and a taxation policy that treated enterprise with contempt.
Global investors believed – rightly – that “old” Labour was incapable of managing the UK’s public finances. A succession of post-war Labour administrations, after all, had steered Britain onto the economic rocks, presiding over sterling crises, soaring inflation and industrial unrest. Labour’s lowest point in government, perhaps, was when Chancellor Denis Healey went “cap in hand” to the IMF in 1976, after his party’s fiscal incontinence has caused a run on the pound. This was Britain’s “economic Suez”, the moment the UK lost its status as a world-class economy.
Gordon Brown’s allies, even now, claim their man “chased away the ghosts of 1976”. I don’t buy it. It was Blair who, back in 1995, just a year into his party leadership, pushed hard for Labour to rewrite Clause Four of its constitution, scrapping the doctrinal (and infantile) commitment to mass nationalization. This instantly neutralized the hard-Left, securing Labour’s conversion in the minds of mainstream voters from a party that would definitely make a hash of the economy to one that might not.
I seriously doubt Brown had it in him to face down the unions in that way, had he then been Labour leader. He would, instead, have moved incrementally, hesitating repeatedly, lest he cause offence within the party that gave him everything. Blair, in contrast, had little time for Labour – which is precisely why he was able so decisively to reform it.
Having let Blair take the political heat on Clause Four, then watch his national popularity soar, Brown piled-in behind him, signing-up (in part) to the modernizing agenda. Then, when Brown, as Shadow Chancellor, chose to define himself as a radical too, proposing to make the Bank of England independent, Blair chose not to block him.
That was the right decision. Even New Labour’s fiercest critics must acknowledge that central bank independence ushered in stable UK growth and relatively low inflation. During the 1997 election campaign, the Conservatives ran under the slogan “Britain is booming – don’t let Labour blow it”. More than justifiable given Labour’s track-record, this message was wrong. The UK grew at an annual rate of 2.4pc during the ten years Blair was in office, compared to 2.1pc on average during the previous half century.
Similarly, when Brown wanted to match the Tories’ relatively tight spending plans for Labour’s first two years in power, demonstrating that New Labour really was “New”, Blair agreed once again. These two actions, announced by Brown in opposition but sponsored by Blair, helped to secure Labour’s credibility with global financial markets – an effort built on the original “Clause Four” moment. This was a major leap forward for UK economic policy-making, shifting the centre-ground decisively away from the insanity of the “loony left”.
Once he entered Number 10, though, Blair’s interest in economics and finance waned. In government, all the major “money” decisions were made by Brown. Blair could have stopped that, but he didn’t – and that blunder cost the UK dearly. For years, Blair indulged his Chancellor’s obsessive secrecy, weakly accepting the Treasury’s refusal to allow the Prime Minister’s office to see the details of major financial announcements.
After his laudable “Iron Chancellor” phase, Brown began spending like billy-o. Deeply resentful of Blair’s popularity, he let rip from around 2001, borrowing more and more and lavishing it on numerous spending projects, all of them closely associated with him, in a desperate bid to court popularity with the electorate.
During the 5 years to 2007, the UK economy was growing well. Tax receipts were buoyant. We should have run budget surpluses, paying off national debt, making our country stronger for the future. Instead, UK state indebtedness soared from £323bn to £617bn – a disgraceful record during a time of relatively fast growth. Blair allowed that to happen, allowed Brown to have his way to avoid a political row. The result was that, when the credit crunch came in 2008, the UK was in a very weak position.
Our weakness in 2008 was compounded by our bloated banking sector and pumped-up credit markets. These two were also a legacy of Brown policies that Blair had failed to keep in check. When making the Bank of England independent, the Chancellor took banking supervision away from Threadneedle Street, giving it instead to a body he’d created, the Financial Services Authority. Basically a Treasury hand-maiden, the FSA did whatever its Whitehall masters told it to do. As a result, UK banks were allowed to do pretty much as they pleased from 1997, as long as it made the economy grow faster, sooner, reflecting glory on Brown.
This was a disastrous, deeply irresponsible state of affairs – condoned by Blair – which, again, made the UK much more vulnerable when the credit crunch came. Yes, the UK economy is now “fully recovered”, with GDP reaching its pre-Lehman high. But our recovery has been the weakest in the Western world. It’s taken 7 years and billions of pounds of output have been lost forever. Our banks, meanwhile, remain far too large and systemically dangerous – a direct result of those disastrous Brown years and despite the FSA’s recent abolition.
Blair let Brown have his way on pension and welfare policy too. In 1997, the Prime Minister failed to block the Treasury’s disastrous pension stealth tax, which has since taken at least £5bn a year from our retirement funds. And Blair could, and should, have prevented Brown from hounding Frank Field out of office in 1998. The former Minister for Welfare Reform’s predictions on the dangers of mass means-testing and tax credits have since come all too true.
Blair deserves credit for greater investment in UK infrastructure under New Labour. Crossrail and the successful Olympic bid owe much to Blair. But, again to avoid a row with his Chancellor, Blair allowed a huge expansion of the private finance initiative. Brown’s Treasury signed hundreds of PFI contracts to construct, service and maintain schools, hospitals and other public buildings. While these kept spending off the government’s books as Brown wished, many were terrible value for money. New Labour signed PFI deals providing schools and hospitals worth £43bn, at a long-term cost to taxpayers of £150bn.
As Prime Minister, Tony Blair was officially “First Lord of the Treasury”. But, when it came to economics, Brown lorded it over Blair. While deserving credit for transforming his party, Blair gave Brown free rein over economic policy – often with disastrous consequences that will be with us for years.