‘Enhancing the Dynamism of the Market’

New Labour came to power at a good moment: the economy had been growing steadily since 1993 and global markets were buoyant. (In the long run, rates of economic growth had been gradually slowing since the 1980s, but in the excitement of the new millennium, no one was worrying about ‘secular stagnation‘.)

Their economic promise was, therefore, one of pragmatic competence rather than radical departure. Existing spending plans would stay, income taxes would remain unchanged, corporate taxes would continue to go down, the ideological commitments of the 1980s would not be challenged, flexible labour markets and low interest rates would remain priorities. Given their ambitious plans for constitutional reform (particularly devolution and the House of Lords), New Labour’s economic strategy was avowedly modest.

For a time, this was very successful. The United Kingdom enjoyed stronger levels of economic growth than other wealthy countries and wages were going up. Although the decline in manufacturing was accelerating, the expansion in service-sector jobs seemed to be filling the gap, even in the areas hardest hit by deindustrialisation. The minimum wage had been introduced without causing the surge in unemployment that big businesses had threatened, raising living standards for some of Britain’s poorest workers.

But with hindsight, it’s now clear that this model was never going to last. By the mid-2000s, the wheels were starting to come off: growth was slowing down and most people’s wages were flatlining. This was not unique to the United Kingdom (although it did start to underperform against its rivals in the OECD from 2004), and perhaps there was nothing else New Labour could have done. But it’s hard to square this stagnation with the hubris and hero-worship that so often colours accounts of the ‘New Labour revolution’.

‘Education, Education, Education’

Another key plank of the ‘New Labour were secret Keynesians’ narrative is their commitment to public services. We don’t have space here to get into the weeds of their reforms: the internal markets, the culture of targets, the focus on ‘choice’. But in general terms, New Labour kept government spending at a fairly low level as a percentage of GDP. Until the 2008 crash, it was generally lower than it had been under Thatcher or Major, despite the disastrous and unforgiveable crusades in the Middle East.

There were, however, dramatic increases in spending on the NHS and education. This was desperately needed, and New Labour should be praised for bringing funding to record levels in those areas.

But compared to earlier Labour governments, they moved cautiously. Over thirteen years, they increased the proportion of GDP going to the NHS by 30%, and that going to education by 24%. In only six years, the Atlee government managed 60% for the NHS and 50% for education. New Labour was actually closer to the first Wilson government which, over six years, increased funding by 23% and 12% respectively. (These figures are for the percentage change in the proportion of GDP going to fund the NHS and education. In absolute terms, New Labour was far more generous than any previous Labour administration because the economy as a whole was so much larger.)

Those increases in spending occurred without substantial increases in taxation (the 50p tax rate was only brought in after the crash in 2009). Improvements to public services were therefore premised on reliable economic growth and financial deregulation giving government the space to skim a little off the top. This cautious approach worked in the short term. But in the long run, it was a fragile achievement, entrenching a preference for low taxes and leaving future governments free to turn off the tap at will.

‘We Are Intensely Relaxed About People Getting Filthy Rich’

Whatever they may say today, tackling inequality was never a priority for New Labour. But they were interested in reducing poverty, and this is where some of their most notable successes are to be found. One million children and one million pensioners were taken out of relative poverty between 1997 and 2010. Through a combination of tax credits and benefits, New Labour did transform the lives of millions.

The importance of these changes should not be underestimated. But children and pensioners can’t tell the whole story. In fact, the total number of people lifted out of poverty, once housing costs are accounted for, is an underwhelming zero. (This figure will surprise some people. For clarity it comes from the DWP and ONS publication Households Below Average Income, 2017/18. See Table 3b: Estimated number of individuals in relative/absolute low income, United Kingdom, Column I, comparing 1997/98 with 2009/10.)

There are of course different ways of measuring poverty and different ways of cutting the data. But looking at the population as a whole, New Labour’s stunning successes feel less impressive.

New Labour’s record on inequality is also one of continuity rather than revolution. Across a variety of different metrics, the same story emerges: inequality grew massively in the 1980s and stayed high and stable under New Labour. This is because, while there were some improvements for those at the bottom of the income scale, there were far greater gains for those at the top.

Interestingly, the IFS have reported that inequality might have gone up even further without New Labour’s tax reforms. Gordon Brown’s ‘redistribution by stealth’ was, in that sense, a partial success.

But the politics of responsibility here are important. We can’t hold the government responsible only for taxation. They can also choose to do more or less to restrain the inequality generated by the market. Economists normally concentrate on inequality after taxes and benefits, which is already high enough. But what sets the United Kingdom apart is the astonishing level of market-generated inequality (i.e. before taxes and benefits).

By that measure, the United Kingdom has been consistently more unequal than the United States and almost every other European nation since the 1980s. New Labour was ‘intensely relaxed’ about that fact. But we might choose not to be.

Politics and Power

The central problem with New Labour’s economic strategy was a political one: they redistributed money, but not power. Tax credits and increased benefits were essentially handouts from the state—handouts that George Osborne would bring to an end overnight. The fragility of New Labour’s poverty reduction strategy should have been clear for everyone to see. But their obsession with ‘winning’ and electoral success seems to have blinded them to the fact that no political party can keep winning forever.

One area where New Labour chose deliberately not to redistribute power was in industrial relations. Blair had welcomed the restrictions placed on trade unions in the 1980s and endorsed a business-friendly ‘partnership’ model of unionism. In 1997, he proudly declared that his new proposals would leave ‘British law the most restrictive on trade unions in the Western world’. It was not a surprise then when New Labour’s flagship Employment Relations Act of 1999 failed to halt the gradual slide in trade union membership and collective bargaining.

More troubling was New Labour’s effort to shift public opinion. This began with a transformation of the Parliamentary Labour Party, where the replacement of working-class MPs with career politicians led to a notable decline in their support for the principle of social security.

But New Labour also shifted the views of the wider public, moving us all in a right-authoritarian direction. As Britain’s leading scholar of public opinion, John Curtice, said in a recent interview, ‘New Labour just dragged the electorate very strongly away from backing working-age welfare… One of the myths about Tony Blair is that he simply took the Labour Party to where the electorate was—no, no, no—Tony Blair achieved what Margaret Thatcher set out to achieve and failed, which was to move the actual dial of public opinion.’

2008: Crisis, Bailouts, and Austerity

Politicians rarely govern in conditions of their choosing and, for New Labour, it was the crash of 2008 that changed everything. But this was a crash with long roots. In the 1990s, New Labour had enthusiastically embraced the post-Cold War economic consensus, building an especially cosy relationship with finance. Although this was in keeping with the spirit of the time, it is worth noting how much further New Labour was willing to go than even the United States.

In Adam Tooze’s magisterial history of the period, Crashed, he notes that their deregulation of Britain’s financial system acted as a ‘crowbar to dislodge regulation worldwide’, with Gordon Brown boasting that New Labour offered ‘not only light but limited regulation’. And while New Labour was clearly not responsible for the collapse of the US subprime mortgage market, their reforms did leave Britain dangerously exposed.

Once the crisis was underway, Gordon Brown took on a surprisingly prominent global role. New Labour’s bailout arrived early and decisively. While Congress was still paralysed, Brown guaranteed deposits and undertook to nationalise failing banks. The scale of Britain’s bailout (which ran into the hundreds of billions of pounds) was larger in relative terms than that of the United States, and it swiftly became a model for other countries in Europe.

In the short term, those bank bailouts were necessary and successful. But to call Brown’s response ‘Keynesian’ is a bit of a stretch. New Labour’s only real attempt to stimulate demand was a temporary cut to VAT. Businesses did initially pass that on to consumers as lower prices, and spending did increase for a few months. But the IFS found that the increase was significantly smaller than the government were hoping for, and that businesses soon raised prices and pocketed the difference.

More importantly, as the threat of total collapse receded by the end of 2009, New Labour turned towards austerity. Today, the Labour Right like to deny that this happened. But in the 2010 election, all the major parties were promising £71 billion a year in cuts.

Analysis by the IFS shows that the only differences were some trivial debates about timing, and a disagreement about what proportion should come from tax rises or from spending cuts. It’s true that New Labour only wanted 66% to come from spending cuts, compared to 80% for the Tories. But both figures were far higher than the 50:50 split favoured by the Major government in the early 1990s.

What More Could They Do?

New Labour turned on the taps, and for that they should be credited. But they did nothing to change the plumbing that Thatcher had left them. And that opens up the key question for the Left: what more could have been done? Would a John Smith Labour government—remember he was twenty percentage points ahead at the time of his death—have been able to do anything else?

That’s a sprawling question which cannot be answered comprehensively here. But it is worth saying that the largest barriers New Labour faced were self-imposed. With enormous majorities and thirteen years in power, they had choices. But their political horizon was limited by three dates: the humiliation of watching a Labour government beg the IMF for a loan in 1976; the defeat of Labour’s radical manifesto in 1983; and the victory of globalised capitalism represented by the fall of the Berlin Wall in 1989.

Haunted by those three dates, New Labour truly believed that there were no alternatives. It is our job today to find them.