The Labour Government's Economic Record and Economic Prospects
Barrell, Ray, Kirby, Simon, Metz, Robert, Weale, Martin, National Institute Economic Review
When the Labour Party came to power in 1997, it had an agenda for reforming the functioning of the UK economy. It planned to introduce a stability-oriented macroeconomic policy that would enhance growth. It was critical of the high level of borrowing that the previous Government had undertaken, and promised to be more prudent. It wanted to increase participation and employment in the economy as a means of both increasing output and reducing poverty. It also aimed to improve the quality of the labour force by enhancing the educational standard of the population and to close the productivity gap between Britain and other European countries.
It is important to assess economic performance both in terms of what else was happening in the world and in relation to what has happened in the past at home. However, it is difficult to assess some aspects of the programme, as the results of any changes introduced may take many years to come through. In particular, it is difficult to assess whether the quality of education is rising, given the well-known problems of producing standardised measures.
We start with a discussion of outturns for the level and volatility of output growth and of inflation. Volatility matters because it affects perceptions of risk in the economy, and higher volatility is likely to be associated with higher risk premia on investment projects and hence lower levels of output also perhaps of the capital stock. Changing trends in government borrowing can also affect the cost of capital and the level of output, and we look at movements in government borrowing over the past 24 years. Government borrowing can depress the level of national saving but it is fundamentally the latter rather than the former which determines whether the country is living beyond its means; we therefore assess Britain's savings performance in the same international context as the other variables. In general, we compare the outturns in the UK since 1997 with previous four and eight-year periods and with events in other countries. We choose France and the US, and not Germany, as comparators. The latter is excluded because in so many instances we would have to say that the impact of German unification vitiates the comparisons we make.
These variables can be described as providing a broad macroeconomic overview. However, we also focus attention on the supply side. We look at how Britain's productivity performance compares with that of France and the United States and also examine how labour supply has changed. After a summary of our findings we provide a brief account of Britain's economic prospects. These are set out in more detail in the chapter describing our forecast for the United Kingdom.
Macroeconomic policies and outcomes
Although the Labour Government's plans were less radical than those of its predecessor in 1945, it acted quickly. The Bank of England, which had been nationalised in 1945 to ensure that it could be subject to political control ("to prevent 1931 happening again" as the Government's Chief Economic Advisor, James Meade, put it), became operationally independent, and a framework for fiscal responsibility was announced. The aim of this change was to provide a guarantee that the Government's commitment to low inflation would be honoured so that people would plan on the assumption that the rules would be kept rather than that they would be broken.
The independence of the Bank was widely welcomed, and inflation expectations, as indicated by the yield spread between indexed and un-indexed government bonds fell rapidly by almost 1 percentage point. It is more difficult to assess the impact of the fiscal commitment, but a surge in tax revenues meant that the budget moved into surplus supporting the Government's claims of fiscal prudence.
Chart 1 shows that output growth has been at a rate similar to that of the last four Conservative years and much more stable as well as faster than in the period 1989-92. …