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The Tories Have Misdiagnosed the Economic Mess and Are Now Applying the Wrong Cure

01/05/2013 10:44 BST | Updated 30/06/2013 10:12 BST

As Labour left office in 2010, growth was over 2%, unemployment was falling, the deficit was down and bond rates were at a record low. Osborne's policies (and his dire rhetoric about the "danger" that the UK could become a North Sea Greece) stopped and reversed all that.

Each successive government of course blames the last for the financial mess it inherited but the truth is that the blame game pales in respect to apportioning blame for the 2008 global financial disaster.

In February this year Moody's downgraded the bond rating of the UK by a notch because of sluggish growth, continuing economic weakness and the high and rising debt burden. The UK economy is stagnant and is now in a triple dip recession.

On March 20th the Treasury Chief presented yet another austerity budget which shows that In spite of evidence to the contrary, the government thinks it can continue to cut its way out of debt, which they says is necessary due to Labour's past mismanagement of the economy. Osborne is asking the country to help him save it from "Labour's mess" but austerity as a debt reducing measure has been proved a failure. Most countries that adopted austerity measures four years ago have significantly more debt than when they started.

It is foolish for the Tories to try to re-write history. All political parties in the UK have faced their fair share of debt throughout the years and sometimes it seems that the economic climate has a life of its own, no matter who is in charge.

The data since 1946 makes for interesting comparisons; Labour's administration had the longest period of surplus from 1998 to 2001, for more years than the Conservatives ever accomplished. Coalition borrowing under George Osborne is shrinking a little each year, but there is still a huge deficit and Moody's predicts that the UK's gross general government debt will peak at just over 96% of GDP in 2016. Even Thatcher - remembered for harping on about the importance of spending less than you save and comparing the budget of a country to the budget of a household, had a worse record on debt than Labour. Her debt as a percentage of GDP was much higher until 1987 (her first 8 years) than it was in every single year under Blair and Brown - until the global banking crisis.

And the responsibility for that must lie in the neo-liberal economic strategies of the Thatcher-Major years, which created the light regulation of industry and finance and the embrace of globalization. Thatcher's Big Bang of '86 and related legislation permitted the conflicts of interest which led to the crisis. With investors were no longer protected by a broker acting as their agent and trying to get them the best price they were forced to deal with integrated firms which maximised profits by giving investors the worst deal they could as they were principals on the other side of every transaction.

The financial crisis began in the US and caught everybody by surprise. Often criticized for profligacy rather than prudence, Gordon Brown was not alone in his inability to foresee the crash of 2008. But he was the hero of the moment and the key architect in bringing major nations together to find a solution. Economic Advisors to Obama I spoke to confirm this and credit Brown with saving the UK and helping to keep the world economy afloat in 2008-9. His decision to put government money into the desperate banks was replicated by the US and others and the deal brokered by the British government at the G20 summit in 2009, was acknowledged by the World Bank as having "broken the fall" of the global economy. By asserting government intervention when it was needed, Gordon Brown finally recognized the need for a tighter hand on finance and capital. There is no reason for us to believe that a Conservative Government would have spent less than Labour on this, particularly when as late as November 2007 Osborne announced it was official Conservative policy to match Labour's spending for the next three years. A position reversed exactly one year later - after the global financial crisis.

Arguably, the New Labour attachment to Thatcherite policies can therefore be seen as the precursor to the UK's current dire public finances, not necessarily excessive government spending. The economist Giles Wilkes, in his analysis of the origins of the national debt of 2012-13, states that about 47% of the debt would have existed anyway and had nothing to do with Labour's spending.

It is therefore difficult to understand how the present government expects a different result from pursuing the same set of old policies. Certainly it gains nothing from trying to blame Labour for its own continuing failures. The IMF have examined dozens of countries that attempted to cut their way to growth throughout history and concluded that austerity lowered growth. Look at Australia, Belgium, Denmark, Ireland, Portugal, and Sweden in the eighties or Finland, Germany, Italy, Japan, and the US in the nineties. Their lesson is straightforward: the more money the government takes out of an economy, the more the economy shrinks.

The time for fiscal austerity is surely over and the long-term costs of the recession are falling unfairly on those who were not responsible for creating it. The Labour Party of today under Ed Miliband's leadership has an opportunity now as a government-in-waiting to come up with a substantial re-ordering of the economy, finally putting neo-liberalism and austerity aside and bringing the simple principle of fairness back into the equation.

The country must learn to generate sustainable growth - there is no quick fix and the economy may take years if not decades to set right.

Dr Azeem Ibrahim is the Executive Chairman of The Scotland Institute and Fellow of the Institute of Social Policy and Understanding.