Labour did not cause the economic crisis – it must counter the myth that it did

http://www.theguardian.com/commentisfree/2015/may/18/labour-economic-crisis-tories

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The first priority of the next Labour leader should be to address head on the idea that the party was somehow responsible for the global financial crisis. Of course, it wasn’t; the fact that so many people believe this is down to some brilliant politics from the Conservatives.

The combination of an exhausted Labour frontbench, an inward-looking leadership election, a recession, and an unfortunate joke note left on a Treasury desk set the scene for a confident Conservative party to ram that message home in 2010, and nothing Ed Balls said over the past few months could counteract that. Nor should we forget why the Conservatives were so eager to seize that chance: they saw the opportunity to wipe out the achievements of Tony Blair and Gordon Brown, who demonstrated, over many years of hard graft, that the country’s economic management was safe in Labour’s hands.

The late Philip Gould, one of Blair’s key strategists, wrote in his diary in 1988: “We must sort out the economic policy as almost a discrete, separate product, sorted out and got right, and made into the bedrock of our credentials for government.”

Related: Some eurozone banks 'just as likely to fail' as they were before 2008 crisis

Unfortunately there is no getting away from the fact that Labour now needs to do that again. First it needs to give itself the confidence to start that journey. Because frankly, if it were true that Labour incompetence had caused the global financial crisis, the party would not deserve to govern. But the facts do not support that.

In 2009 the International Monetary Fund published estimates of the country of origin of the bad debts that were floating around global financial markets that eventually caused the banks to seize up. The value of these “toxic assets” that originated in the US was $3.1tn, compared to $900bn in the whole of the Europe and Asia combined. This was not a problem that was primarily created in the UK; it arose from financial deregulation in the US – so much so that the outgoing boss of the US banking regulator admitted that he’d learned from the crisis that banks could not be trusted to regulate themselves.

Even if our financial sector had been markedly different, we still would have been hit. Germany, for example, has a banking sector less than half the size of ours and had a deeper recession. And remember, the US followed us in implementing measures to control the crisis. The lesson to be learned? Financial regulation matters. Yet going into the crisis the Tories were pushing us to deregulate further. I know: I was the banking minister at the time.

Labour also needs to be clear that spending in the run-up to the recession was not profligate. Of course it could have been lower: we were running a budget deficit of around 3% at the time. But we’d run surpluses in previous years, and we had commitments in the 2008 budget to bring the deficit down, in an environment where the consensus was that the economy would keep growing. But let’s be clear: even if we had run a surplus in those years, it would not have made a marked difference to the financial tsunami that then hit the UK and other countries. The effect of the financial crisis was far greater than the effect of the deficit.

Gordon Brown implemented and kept to his golden rules – there was no calling in the IMF for us

Labour can actually argue the opposite: it is because Brown had implemented and kept to his golden rules in the previous years that our economy responded to the crisis in a similar way to the economies of the US, France and Germany, and has been more secure than Ireland, Spain and Greece. No calling in the IMF for us. It wasn’t the 1970s, remember. And the lesson to learn? This type of budget discipline really matters, to keep our economy resilient. The policy response? We should always run surpluses when the economy is growing, Keynesianism in good times as well as bad.

How Labour explains this to the public is a different matter. It must start by accepting what people think, and then using its strategic policy brains to work out how to get out of this hole. But we should not apologise and beg forgiveness for crimes we have not committed. We’re is better than that. It’s just time to do some hard work to prove it.