Labour leadership candidates divided as Yvette Cooper backs pre-crash spending

The first big dividing lines of the Labour leadership contest opened up on Thursday when Yvette Cooper, the shadow home secretary, refused to accept that Labour had spent too much prior to the 2007 banking crisis, making the economy more vulnerable when the crash came.

Other candidates have given a different view. Speaking on BBC Newsnight, the shadow health minister, Liz Kendall, accepted that there had been overspending, while Chuka Umunna, the shadow business secretary, has been more ambiguous.

All sides in the party debate are willing to say that Labour did not regulate the City sufficiently prior to the crash and, in common with the current permanent secretary to the Treasury, Sir Nicholas Macpherson, would say the crash itself was a banking crisis pure and simple. But there is a debate about whether Labour could have run big enough surpluses to make the situation better when the crisis came.

There is a widespread public view that the party mismanaged the economy when last in government, and the political debate for Labour is whether to continue to defend the Treasury record during the era of Gordon Brown’s chancellorship, or instead admit error and move on.

Asked on BBC Radio 4 whether Labour was overspending before the crash, Cooper said: “I think there were things that we were spending wrongly on, there were issues that we would have been spending money, too much money on – for example there were things that went wrong with the NHS computer system, with all sorts of things like that – but the deficit at the time was 0.6%, the current deficit, and all the political parties at the time were all supporting the spending plans.”

Cooper defended the high level of public spending by 2010, saying: “You had banks crashing. Not just in America, but all over the world. We were at risk of going off a cliff. Not being able to get our money out of the hole, but also losing our savings, all of us losing our pensions, the money that we might have saved for a deposit. In those circumstances, was it right for governments to work together to support the economy ... and to support the businesses? … This was the right thing to do.”

Umunna, asked about the pre-crash structural deficit, said: “We should not have been running a small and historically unremarkable deficit.”

By contrast, Tony Blair, in his autobiography, argues: “We should also accept that from 2005 onwards Labour was insufficiently vigorous in limiting or eliminating the potential structural deficit. The failure to embrace the Fundamental Savings Review of 2005-06 was, in retrospect, a much bigger error than I ever thought at the time.”

On Newsnight, Kendall said: “We were spending too much before the crash.”

The Office for Budget Responsibility, in its major review in this area, found: “Looking back at the pre-crisis era, it is hard to argue that the tax and spending policies implemented in the early and mid-2000s are in themselves an important cause of the crisis and recession. But there was undoubtedly weaknesses in fiscal management during that period, some apparent at the time and some more with the benefit of hindsight.

“The Labour government increased public spending significantly as a share of GDP in the mid-2000s, arguing this would be paid for by an increase in tax receipts that then did not fully materialise.”

It added that the OECD warned at the time that the UK had entered the crisis with one of the largest structural deficits in the industrial world and this limited subsequent room for manoeuvre.

Greg Hands, the new treasury secretary, seized on Cooper’s remarks, saying: “It is the same old faces peddling the same old ideas.”

Powered by article was written by Patrick Wintour Political editor, for on Thursday 14th May 2015 17.23 Europe/ © Guardian News and Media Limited 2010