FactCheck: Labour's recovery?
Updated on 28 January 2010
How much credit does the government really deserve for getting the economy out of recession? We asked respected economic modellers to put two big policy decisions - the fiscal stimulus and interest rate cuts - to the test.
The claim
"We faced a second big choice - between letting the recession run its course, or stimulating the economy back to growth. And we made our choice; help for small businesses, targeted tax cuts for millions and advancing our investment in roads, rail and education."
Prime Minister Gordon Brown, speech to the Labour party conference, 2009
"The decisions taken by Alistair Darling and all the ministers of this government have meant that we have already seen off the worst of the recession."
Prime Minister Gordon Brown's new year message, 30 December 2009
"We took the right action in the recession; the opposition advised the wrong action."
Prime Minister Gordon Brown, prime minister's questions, 13 January 2009
The background
Earlier this week, official figures showed the economy was finally staggering back into growth after a long 18 months of decline.
And as the quotes above show, a recurring government claim during the downturn has been that, although times may be tough, they are taking the right action to help get Britain through.
In the opposite corner, Labour sees the "do nothing" Conservatives. David Cameron's party criticised the government's plans to increase spending in the face of the recession, saying that Britain couldn't afford to rack up any more debt.
So now we see the light at the end of the tunnel, how much of the recovery can the government actually take the credit for?
The analysis
Channel 4 News' FactCheck asked Oxford Economics - a leading macro-economic consultancy - to estimate the likely effect of two big policy decisions on the economy. As well as the fiscal stimulus, they looked at the effect of monetary policy - the massive slashing of interest rates by the Bank of England which started early last year.
As a baseline, we know that between the first quarter of 2008 and the third quarter of 2009, the economy shrank by 6 per cent.
But what would have happened if these levers had been left alone?
Fiscal Stimulus
The pre-budget report 2008 and budget 2009 whipped out around £30bn of fiscal loosening. This included a year-long VAT cut and a short-term splurge on investment spending, as well as smaller measures targeted at particular sectors, such as the car scrappage scheme.
Oxford Economics modelled what would have happened if the government had not cut VAT, and had stuck to the spending plans it set out in the pre-stimulus, pre-recession budget of 2008, which saw steady spending growth for the foreseeable future.
Their model suggested that, had there been no fiscal stimulus, output would have fallen by 6.4 per cent between 2008Q1 and 2009Q3. That's a bit worse than what actually happened, though not dramatically so.
"The fiscal stimulus isn't that big as a proportion of GDP - compared to countries like Japan and the USA, it's actually quite small," said Andrew Goodwin, a senior economist at Oxford Economics. "The impact would be greater for some of the groups that were targeted - say, a small business benefiting from a measure like the car scrappage scheme - but across the whole economy, it's not big enough to make a really big difference."
The government is also taking action to recover its largesse pretty quickly - the VAT cut has already been reversed, and investment spending will be cut in the coming years to make up for the extra spend during the recession.
This fiscal tightening means that by the end of 2010, Oxford Economics forecast the economy would actually be slightly bigger than if we had taken the no-fiscal-stimulus route - assuming we still had the money to implement the Budget 2008 spending plans.
Interest rates
Interest rates aren't set by the government; in 1997, Labour handed that power over to the Bank of England, so it's arguable how much of the credit they can claim for this part of the economic picture.
Interest rates stood at 5 per cent for much of 2008; in October, an aggressive-cutting programme began, until the base rate was eventually slashed to a record low of 0.5 per cent in March 2009. Some of the most obvious beneficiaries have been home-owners on variable rate mortgages, who saw their monthly payments dramatically reduced.
If interest rates had been held at 5 per cent, Oxford Economics's model showed GDP falling by 8.3 per cent between 2008Q1 and 2009Q3, rather than the 6 per cent drop that actually took place. GDP would also have fallen into 2010.
This is a pretty extreme scenario - it would be strange for the Bank of England to hold steadfast on interest rates right through a recession. If rates had been cut only to 3.5 per cent - the last pre-recession low - the economy would have shrunk by 7.4 per cent, and again carried on shrinking into this year.
There was another plank of monetary policy - quantitative easing - by which billions of pounds of extra funds were pumped into the economy. Oxford Economics said there is too much uncertainty about the actual effect of quantitative easing to adjust for it in the models. It's possible things would be even worse now, had there been no quantitative easing.
Jobs
If all this talk of GDP seems a bit theoretical, there is another way to measure the likely effect of government policies - and that's in terms of jobs.
As it is, unemployment hasn't been as bad as many expected, and the latest figures showed a fall in the number of people unemployed, for the first time in 18 months.
Still, the number of unemployed people is expected to average at around 2.51 million in the final quarter of 2009.
Had there been no fiscal stimulus, Oxford Economics estimated the number would have been higher - around 2.59 million.
If interest rates had been left at 5 per cent, it would have been much higher - 2.94 million.
And if interest rates had been cut to 3.5 per cent, it would have been somewhere in the middle - around 2.75 million.
The verdict
It's a tentative thumbs-up to the government - with no fiscal stimulus, the recession would have been longer and deeper, and there would be more people out of work. However, the fiscal tightening that is pencilled in to follow, means the positive effect of the fiscal stimulus may be all but cancelled out by the end of this year.
Either way, Oxford Economics' work suggests the bigger pat on the back should go to the Bank of England - cutting interest rates did far more to help repair the economy.
We haven't looked at every single thing the government and the Bank of England did in the face of recession - the government has long been proud of its decision to save major banks when the system looked likely to collapse, and there were too many uncertainties around quantitative easing to include it in the models.
But we can say that, without these two major and quantifiable policy decisions, things would have been worse.
FactCheck rating: 2
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The sources
Oxford Economics
Hansard: 13 January 2010
Gordon Brown's new year message
Gordon Brown Labour conference speech 2009
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