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Britain is at a turning point. As Labour’s most electorally successful prime minister prepares to quit the stage, what kind of country will his successor inherit? How do you think Britain has changed since Labour came to power in 1997?

Chris Giles, (above left) the FT’s economics editor, and Martin Wolf (above right), the FT’s chief economics commentator, answer your questions.


New Britain - the state of the nation

Discussion forum - How has Britain changed under Labour?

Martin Wolf’s Economists’ forum

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How will the country cope with the almost tripling of the national debt since Labour came to power, and with raising international rates, will and potential sucessors inherit an unworkable UK economy?

Paul Flusk, Wiltshire

Martin Wolf: Public sector net debt has fallen in relation to GDP over the past nine years and is below levels in other G7 countries. If you are referring to all debt, including household debt, it has indeed risen in relation to GDP, but by much less than three times. Since interest rates are low by historical standards and likely to remain so, it is not obvious that this will create a huge problem.

Chris Giles: I’ve just checked and net national debt, has not tripled. It has gone from £357bn in 1997 to £466bn in 2005. As a share of national income, it has fallen from 43 per cent to 37 per cent. Now, sensible people can argue about whether the figures are quite accurate, given Labour’s willingness to use off-balance sheet financing mechanisms, but the size of these is small relative to the overall figures. There is no way the national debt can be considered a big problem for the UK.

In terms of personal debt, which has grown much more quickly, but it still has not tripled relative to incomes. The question is whether personal debt’s growth is sustainable or will lead to slower consumption growth in future. The answer is unknown, since it depends, among other things, on the future productivity performance of the UK, but I suspect there might be a period in which consumption growth is slower than it has been. I do not think this makes an unworkable economy, however, just one that needs to be flexible.

How has the real treatment, that is the net effect of all taxes and public spending, differed from the treatment received at the hands of the Conservative party? Has the country outside the South East fared better, worse or the same as it would have done under the same conditions and a Conservative (or indeed liberal) government?

Gavin Bewick, Newcastle

MW: This is almost impossible to answer, since the impact is very complex. But the big point is that taxes and public spending have risen overall. Probably, the country outside the South East has done a little better out of Labour’s spending on public services and transfers. So have the relatively disadvantaged.

CG: There is no doubt that Labour has redistributed more from rich to poor than previous Conservative governments, or than John Major’s administration was planning in 1997.

While the performance of the regional economies had diverged a lot under Conservative governments, research from Swansea University suggests it diverged even faster under Labour. This was not Labour’s intention and it is a fair bet that under the Conservatives, the economy outside the South East might have performed even worse, since they would have redistributed less money from the South East to other parts of the country. The only reason to dispute this logic is if, as groups like the Reform think-tank argue, the other parts of the UK economy would have been much more dynamic without the splurge of government cash that has fallen from the sky in the last seven years.

Gentlemen, I have three questions about economics which I approach from a relative layman’s point of view (writes John Bird, from Western Australia):

Q1) Martin in your article ‘How Labour steered an economy going global’ you note that inflation in the UK has been contained, while the service sector of the economy has grown and the manufacturing sector has relatively declined. Is it fair to say that productivity in the service sector has not increased but prices have; meanwhile prices in the goods sector have been reduced due to cheap imports. Thus much of the overall growth in the economy has merely come from increased prices in the service sector?

MW: No. We are talking about real growth in the economy - that is the expansion in supply after adjusting for price increases. Of course, it is difficult to measure inflation in services. So it is possible that real output of the service sector has been overestimated or, indeed, underestimated.

Q2) Why is it that inflation is measured without including house prices in the measuring basket. I understand that residential rent is included in the basket, but rent increases are a lagging (by 3 to 5 years)and inevitable result of house price increases. Firstly it’s clear that if house prices have gone up say 10% and inflation is contained at 2.3% that the inflation figure is bogus. Second any measure to cure inflation is merely locking the stable door after the horse has bolted. Who are we trying to fool, or is there another agenda that I am not privy to?

MW: Incorporating house prices is difficult, because houses are an asset and mostly a very old one, not a new good or service. What one wants is a price of housing services. But for owner-occupied housing, this is difficult to measure. After all, for most home-owners the price of current houses are irrelevant to their cost of living, since they already own one. As I understand it, housing services are not included in the consumer price index we use, which follows practice in the eurozone. The reason presumably is the difficulty of measuring the change in prices.

CG: I don’t think there is any particular secret agenda. the reason why owner-occupied housing is not included in the UK or European consumer price index is well-known. The statisticians, while compiling a standardised European measure wanted to include housing, but could not agree on the right way of doing it. They are still discussing the issue at Eurostat, the European statistical agency. It is a tricky issue, particularly when the owner-occupied sectors are very different in European countries. But for the UK, there is an other answer - the old retail prices index does include a housing component and although few statisticians would argue that the index included housing in a particularly sophisticated way, it is there. The simple facts are that the broad inflation trends on either the RPI or the CPI are the same: inflation has been low and stable. On the RPI, it is measured as just over 1 percentage point higher on average a year than on the CPI.

Q3) Curing inflation is a key role of a central bank, and the cure involves raising interest rates to increase an inelastic expenditure area (ie one that people can’t easily escape) to remove discretional spending money from the economy. However with the recent fuel price rises, the rises both fuelled inflation (scuse the pun) and were inelastic (ie people can’t easily escape paying the increased costs). On the strength of those inflationary rises we saw central banks raising interest rates. Now we have slight declines in fuel prices and I’m now reading that interest rates may need to rise to mop up surplus discretionary money in the economy that isn’t being spent on fuel. Is it possible that raising interest rates has more to do with being seen to do something and the central bankers aren’t really as clever as we think they are?

John Bird, East Fremantle, Western Australia

MW: On the whole central banks have not responded to rising oil prices in any significant way, which they saw, rightly, as a temporary shock to the price level, not part of an inflationary process. Credible central banks should not need to respond to such temporary movements in particular prices and, by and large, have not done so. Of course, they do have to worry if a specific price shock turns into a general wage-price spiral. That may justify a modest tightening.

CG: Central bankers are certainly worried that their perceived power was something of a mirage. In particular they are concerned that higher inflation, although started by higher oil prices, has become entrenched in many economies around the world, particularly since global economic performance has been so strong recently. Unless inflation and economic growth slows quickly, the chances of further tightening of monetary policy in many countries must remain high.

Have Labour’s policies made potential Sterling crises more or less likely?

Dr. R. Kanza, Egham

MW: On balance, neither. It is possible to argue, however, that the combination of a large increase in the fiscal deficit with relatively high interest rates has led to an appreciated real exchange rate and an increased current account deficit. That, in turn, may make a crisis more likely in the years ahead. But I would regard a smooth depreciation of the exchange rate as more likely.

CG: Less likely. The credibility of an independent central bank setting monetary policy has enhanced the credibility of the UK abroad. That does not mean a run on sterling is impossible: the UK still runs a reasonably large current account deficit, but the facts that the Labour government enhanced policy credibility and did not join a semi-fixed currency zone, has made sterling less vulnerable to speculative attack.

Labour has been a disaster across the board for the country - it has for me - if there are some redeeming features what exactly are they?

Lorne Irving, Ayr

MW: I am a bit surprised by that judgement. The economy has enjoyed almost ten years of sustained expansion. It is true that the benefits have not been equally shared. But it is not clear what Labour could have done about that. It has certainly tried to redistribute a part of the gains to the less fortunate and successful people and regions.

CG: Not everyone has prospered under Labour. That is for sure. But, I’ll name three good things that have happened: a) stable economic performance, which had been unusual in Britain before 1992; b) rising living standards relative to other large European economies; and c) relatively stable income inequality, unlike the US, so, up to now, the benefits of globalisation have been shared among the population.

Gordon Brown launched New Deal in my local Job Centre in January 1998. I asked about the Professional and Executive vacancies register and was told by civil servants present that it was privatised in 1984 and ceased to exist in 1988. I am 50 and still unemployed but do not claim benefits. Since Labour came to power I have defended the Chancellor’s decision to give independence to the Bank of England. I am a former IMF economist. Last year I joined the Scottish National Party. Is this a rational way to respond to a New Labour Government that has lost its marbles? And what will England do in 2010 when Scotland finally decides to secede?

Neil, Dundee

MW: I have no idea whether this is a rational way to respond. But the answer to your question is that England will be richer for Scotland’s departure. Much of the North-Sea oil has been used up, after all, and Scotland is a huge beneficiary of transfers from the rest of the country. Personally, I am in favour of the union, but the economic case for England is pretty weak.

CG: If Scotland secedes in 2010, there would be lots of difficult questions surrounding tax revenue sharing, and perhaps even sharing a common currency and monetary policy. Unless you use the most optimistic (unrealistic) assumptions about the ownership of dwindling North Sea oil taxation, Scotland is the beneficiary of net redistribution form England. Unless this money is positively bad for Scotland, and is crowding-out lots of private sector opportunities, Scotland would be the loser from secession.

Over the last ten years I have seen increasingly wealthy public sector employees and recent well-off pensioners dictating how our region will develop at the cost of the private sector. Has this become the norm?

Stuart Jones, Kendal.

MW: I would have thought so. Labour is the party of the public sector. That remains true today, as it has always been.

CG: No. While it is the norm in your region and in the North East and in many other parts of the country, the private sector has gained an ever bigger share of economic muscle in London and the South East, for example.

Why has inequality of wealth grown under New Labour? Why has there been no reform of the so-called ‘Inheritance Tax’ on the cumulative lifetime total of gifts made and estates left? Why is inheritance tax a double tax on cumulative lifetime total of capital gifts made and estates left instead of a rightful tax on capital gifts and inheritance received that beneficiaries have done nothing themselves to create, earn, make or save? Why is there tax at 40 per cent on the lifetime total of capital gifts made and estates left - above 285,000 - including the value of homes when there is no tax on vast amounts of lifetime gifts and business, farming and shareholding assets inherited?

Dane Clouston. Opportunity. The Campaign for British Universal Inheritance, Oxford

MW: Inequality of wealth has grown because of the rise in house and other asset prices (notably shares) and the rising inequality of income. The failure to provide a rational tax on receipts rather than bequests is a consequence of political cowardice, I would guess. But I did not understand the reference to a double tax on cumulative lifetime total of capital gifts made and estates left. The tax now is on gifts made within seven years of death and estates. Obviously, this makes no sense at all.

CG: You are making an argument for a more progressive tax treatment of inheritance. Essentially I view inheritance tax as largely a political question rather than a big economic question, one that should be up for debate at elections. Since it is a one-off tax on accumulated wealth, it is very visible for the very small number who pay it in any tax year.Though I can see many arguments in favour of your suggestions for more redistributive incentives in an inheritance tax, I think it will only have a large impact on the distribution of wealth if the accumulation of wealth itself was more equal. I think the tax regime is a second order issue.

How do we know if the public services we receive represent value for money given the taxes we pay? If there is a sensible answer to this question, how could public services be provided more efficiently and how would you rate the current governments performance in this area?

The current government has tried to increase productivity growth by identifying and correcting market failure, the previous government by reducing the role of the government in the economy and letting business get on with it. These very different strategies have yielded exactly the same rate of growth why is this?

Rob Parker, London

CG: In answer to the first part of your question, it’s very hard to know precisely, since the quality-adjusted output of the public sector is almost impossible to measure. But I think the best proxy for knowing is that ministers clearly think things have gone wrong in recent years. There would not be the focus on cost savings now if they thought the huge increases in cash had achieved what they wanted, regardless of what they might say to the Office for National Statistics when they want the official measures of productivity changed.

One of the most obvious ways of testing the efficiency of public services is to offer the opportunity to the private sector to provide the same service. Notwithstanding the problems of measurement, this is surely the way to increase the efficiency of public service delivery. Introducing some element of competition for the right to provide services, should bring the costs down.

The answer to your second question is probably, because current government policy has a small impact relative to the innate drivers of productivity which are rooted in aspects of society which are beyond government to change quickly.

That said, I think the emphasis on market failure is often dangerous. Identifying a potential market failure is not a sufficient reason for government intervention, since government failure is all too common and potentially damaging. The worry for Labour is that - to the extent that government matters - they might well have benefited from the long-run effects of Conservative reforms while the detrimental effects of Labour tinkering have not yet been felt. That reasoning, at least, accords with the evidence that productivity growth in the first four years of this government has been more impressive than in the past five.

MW: The answer is that we do not know whether we are receiving value for money. It is almost impossible to measure the real output of public services (though the British are now trying to do so). I tend to feel that the best way to provide public services is to split the government as purchaser from the providers. In most services (though not all - think of the police) it is possible to have competing providers and a monopoly public purchaser or even to give the money directly to individuals. My column last week dealt with this subject. I regard government efforts in this area as perhaps worth a B grade. There is movement towards competition among providers and more private sector providers. But the systems for doing this do not seem to have been thought thoroughly through.

We do not really know how to raise productivity growth. It depends on so many things. But I believe the heart of it is maximising competitive pressure in the economy. That does not mean just letting business get on with it. Often it requires changes in policy as well, to create more competitive market conditions. I think this government has done quite well on this score but has offset these gains with damaging interventions in the form of excessive regulation and complexity in the tax system.

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