Tuesday, 31 March 2015

The real recession story and how Labour's plans to fix the deficit are better than the Tories'

Admittedly, New Labour made a mistake in spending so much in the previous government and they mistakenly liberalized the banks which was what really caused the global recession which started in the US. The Tories would've done no better - it was the Tories who really liberalized everything under Thatcher and, coincidentally(?) there were more recessions thanks to their liberalization - they were hardly opposing New Labour's liberalization of the banks.

The Tories then supported austerity once the recession hit - scapegoating Labour for causing the recession saying that they spent too much and created too large a deficit (they claimed that government spending caused recession - any economist knows that's completely wrong - who's the economically illiterate party now?). Interest payments were not outstripping borrowing so the deficit was a long-term problem - not a short-term one that caused the recession (as the Tories say).

Indeed, if the Tories got in in 2008 (if there were an election then) and successfully implemented harsh austerity there and then, the recession would've massively worsened due to the sharp reduction in government spending which reduces Aggregate Demand (and so, GDP would've fallen even more). What instead happened was that banks were bailed out (which effectively counts as spending), spending was increased to lessen the effects of the recession (partially in the form of automatic stabilizers such as unemployment benefit as unemployment increased) and the effect of the recession was lessened. In fact, Brown was hailed as a saviour of the world for advocating Keynesian spending as a way of avoiding a total meltdown!

In the 2010 election, Labour supported eliminating the deficit by 2020 while the Tories promised it would be balanced by 2015 - which they failed at and are now aiming for 2018 which would require (even more) colossal cuts. Labour are aiming for 2020 minus investment (which pays for itself). We'll see if the Tories do any better at realistic targets this time...

There's good reason why growth has been so horrendously slow and wage rises have been slow to occur and it's because the Tories cut during a recession when, really, you've got to spend to encourage spending. Now that we have a stable recovery we can cut, both Labour and the Tories agree on this.

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