Why Tony Blair and his critics are both partly right on inequality

New Labour significantly reduced child and pensioner poverty. But overall inequality was unchanged and the party was too deferential to neoliberalism. 

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Did New Labour really ignore inequality? Responding to Jeremy Corbyn’s claims that successive governments have neglected it for decades, Tony Blair replies that New Labour “made the UK more equal, more fair and more socially mobile.”

Both men, I think, are partially right. Blair is correct to say that New Labour dramatically increased spending on public services and reduced child and pensioner poverty. However, overall inequality changed little under New Labour despite the fall in poverty. One reason for this is that, as Robert Joyce and Luke Sibieta at the Institute for Fiscal Studies have pointed out (pdf), the government's tax and benefit reforms “had relatively little net impact on the top half of the income distribution”. Another is that pre-tax inequality rose in one important respect at least: the share of pre-tax incomes going to the top 1 per cent rose from 10 per cent to 12 per cent between 1997 and 2007, before falling back as a result of the 2008 financial crisis.

It is in this last fact, I think, that New Labour’s failure lies, and where Corbyn has a point. Blair and Brown were far too managerialist, and too deferential to bosses: this much was evident not just in Gordon Brown’s lauding of them as wealth creators and courageous leaders but in his inviting the likes of Derek Wanless, David Freud and James Crosby to conduct policy reviews. Bosses, New Labour thought, were trusted experts.

In this respect, New Labour was indeed neoliberal. And this had at least three big costs.

One is that the importing of crude managerialism into the public sector failed to raise productivity: the Office for National Statistics says this flat-lined (pdf) under New Labour. Yes, public services improved. But this was simply because the government threw money at them. This made the health of the public sector dangerously dependent upon that of the private sector.

The second is that it meant that New Labour under-appreciated the many pathways through which the excessive wealth and power of the top 1 per cent can worsen economic performance.

Thirdly, it fostered the belief that private sector companies could run themselves tolerably well if left alone. The banking crisis, however, revealed this to be a fiction.

That said, it is a little harsh of Blair’s critics to blame a lack of banking regulation for the economic crisis. For one thing, the crisis was not due mainly to rising domestic debt. The banks that failed in 2007-08 did not, for the most part, do so because their loans turned bad. Instead, the main failures were due to terrible takeover decisions, such as RBS’s purchase of ABN Ambro, or because they relied upon wholesale funding which dried up in 2007: this was Northern Rock’s problem. Credit controls would probably not have prevented these failures.

And for another, the crisis was global. It would have hit the UK even if we’d had tighter regulation. In fact, in 2009 UK GDP fell only slightly more than the OECD average (4.2 per cent against 3.4 per cent) and it fell less than it did in Germany and Sweden, whose economies are often held up as models for the UK. No reasonable policies could have insulated us from the global financial crisis.

From this perspective, it is absurd to blame New Labour for the subsequent austerity (except to the extent that we should blame it for losing the 2010 general election). We’d have had a deep recession in 2009 whatever the government did, and this would have greatly increased government borrowing thereby giving the Tories and the media the chance to complain about Labour profligacy. Austerity is the fault of the Tories and Lib Dems, nobody else.

New Labour had its faults, many of which are more obvious with hindsight than they were at the time, and the left is wholly correct to want to move on from its economic policies, which are now out of date. But these facts should not detract from another fact — that Labour did indeed do much to reduce poverty.

This piece first appeared on Chris Dillow’s Stumbling and Mumbling blog

Chris Dillow is an economics commentator for Investors Chronicle. He authors the blog Stumbling and Mumbling.