UK economic performance under Labour.
| Author | Corry, Dan |
| Position | Essay - Labour Party - Essay |
It is right that vigorous debates are going on about what Labour's economic policy should be going forward towards the next election. These debates have two dimensions: on the one hand, what is right from an economic point of view; and on the other, what has any chance of working electorally. Ideally the two come together--but life is not always like that.
Naturally, in looking at these issues, commentators end up basing their approach on what they think happened in the New Labour years. Therefore it is crucial that in thinking about the future, we establish what actually happened during those years, so that the right policies for the future can be formulated. At present there is a danger that the way the economy has evolved since the financial crisis in 2008 has deeply and erroneously coloured the view of what actually happened, what did and did not work, and where we go from here. In this article we look beyond the hype and the heat to focus on the numbers and analyse the economic facts.
What did happen under Labour?
A common view is that the performance of the UK economy between 1997 and 2010 under Labour was weak and based on an artificial bubble. According to this view, the UK's current economic problems are a consequence of poor policies in this period. The question is whether the data back this up or not.
We focus on measures of business performance, especially productivity growth. This is a key economic indicator as, in the long run, productivity determines material wellbeing--wages and consumption. Productivity determines the size of the 'economic pie' available to the citizens of a country. Of course it is by no means everything, and we are leaving out key issues like equality and environmental sustainability, as well as jobs and long term unemployment. The relationship between economic growth and concepts of happiness or wellbeing are much debated, but productivity is still crucial for understanding what was happening in the Labour years. We remain strongly of the view that the growth of national output per person is, all else equal, a desirable thing.
The big picture
There is an argument for focusing our analysis of the Labour period only up to 2008--that is, before the Great Recession, since the financial crisis was essentially a global shock and it seems tough to 'blame' it all on Labour. However a sterner test is to look across the whole period in which Labour was in government right through to 2010. Since we know that the UK was hit harder than most other nations by the Great Recession we would expect the record to be poorer when including the later years. In what follows, where the data allow it, we look at the longer period.
We begin by looking at the UK's performance relative to some key comparator countries, namely the US, Japan and the three largest EU economies, Germany, France and Italy. In Table 1 the first three columns examine the 1997-2010 period and the last three columns the 1997-2007 period. The first column of each section looks at GDP itself and shows that in both periods the UK comes in a close second to the US in terms of average annual GDP growth.
Table 1: Growth of GDP, GDP per person and GDP per adult, 1997-2010 1997-2010 (whole 1997-2007 (up until period of New Labour) the Great Recession) GDP GDP per GDP per GDP GDP per GDP per capita capita capita capita (person) (adult) (person) (adult) UK 1.93 1.42 1.22 2.89 2.43 2.20 US 2.22 1.22 0.99 3.00 1.96 1.64 Germany 1.24 1.26 1.01 1.67 1.64 1.35 France 1.66 1.04 0.92 2.31 1.66 1.51 Japan 0.59 0.52 0.31 1.15 1.02 0.79 Italy 0.69 0.22 0.19 1.45 1.01 0.99 (Sources: Cumulative annual growth rates (in per cent). Analysis based on OECD data (extracted on 28 Oct 2011 from OECD. Stat). GDP is US$, constant prices, constant PPPs, OECD base year (2005) from GDP database. Adult' refers to 'working age adults', obtained from US Bureau of Labour Force Statistics, and includes the civilian population aged over 16. Data for Unified Germany from 1991) Of course, absolute economic growth is not as important for welfare as national income per person as this will ultimately determine wages and consumption. The second column therefore looks at the growth of GDP per capita (in terms of the total population). It shows that the UK outperformed every other country in the period 1997--2010 (growing at an average annual rate of 1.42 per cent a year compared to 1.22 per cent in the US and as low as 0.22 per cent in Italy).
Could some of these patterns be driven simply by different demographic trends? For instance some countries had growing proportions of those too young or too old to work? To partially control for this, the third column of Table 1 presents GDP per adult (and this is the main measure of overall economic performance that we use in this paper). This does change some of the rankings and levels, but here again, the UK outperformed all the other advanced nations including the US and Germany.
We conclude that relative to other major industrialised countries, the UK's performance was good after 1997, even more so if we end the analysis before the Great Recession in 2008.
Just a continuation of trends established under Thatcher?
In order to try to appraise Labour's impact on the economy, we also compare the UK's performance over 1997-2010 not only to its most relevant peers, but also its performance over the preceding years. For this purpose, it makes most sense to consider the period 1979-1997, which corresponds to the Thatcher-Major led Conservative governments.
The results for GDP per capita are contained in Figure 1. We base each series in 1997 to show the cumulative performance of the UK and other countries before and after the 1997 election, so the slope of the line can be interpreted as growth rates. In the post-1997 period, the fact that the darker, dashed UK line ends up above all other countries shows in graphical form what was already revealed in the numbers in Table 1. In addition the fall in GDP per capita in the Great Recession is evident in all countries, but appears particularly large in the UK.
Going back to 1979, Figure 1 shows that the UK grew faster than its peers in the 1979-1997 period. Under the Conservative period, UK per capita GDP growth was similar to the US and significantly stronger than French growth.
[FIGURE 1 OMITTED]
The UK's strong productivity performance relative to other countries in the New Labour years can therefore be seen as a continuation of the trends during the earlier period of Conservative government from 1979. This broke a pattern of relative economic decline stretching back a century or more (Crafts, 2011). UK GDP per person fell relative to the US, Germany and France from 1870 to 1979, but over the next three decades this trend reversed. UK GDP per capita was about 23 per cent above the US in 1870 whereas the US was 43 per cent ahead of the UK in 1979. By 2007, the UK still lagged behind the US, but the gap had closed to 33 per cent. During the past thirty years, the UK has had a faster catch-up of GDP per capita with the US under Labour than under the Conservatives, although there was a slower rate of relative improvement over France (Corry et al, 2011).
What drove the good GDP performance in the Labour years?
We can go further in trying to discover what drove this good GDP performance over 1997-2010. GDP per capita can be decomposed into productivity growth and labour market performance since mathematically, GDP per capita = GDP per worker (that is, productivity) x workers per capita (that is, the employment rate).
Figure 2 presents the decomposition using GDP per worker as a measure of productivity. Panel A (the top panel) shows that the UK's GDP per worker growth was as fast as that in the US between 1997 and 2008, which is impressive as these are the years of the US 'productivity miracle' (Jorgenson, 2001). So the UK managed to hold the tail of the US tiger. Since the Great Recession engulfed the developed world, US productivity has outstripped that in the UK, which reflects the much more aggressive job shedding in the US in response to the downturn. UK productivity growth was better than continental Europe, however. Again, the UK productivity performance was also strong in the pre-1997 period--in fact, during the 1979-1997 period UK GDP per worker...
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