Here’s a question for you. Consider the following statement: “We must live within our means, so cutting the deficit is the top priority.” Do you agree?

If you said yes, you are with the majority. If you said no and are a member of the Labour party, you are almost certainly planning to vote for Jeremy Corbyn to be its next leader.

The question was put as part of Labour’s inquest into why it lost in May and, according to Ed Miliband’s policy coordinator, Jon Cruddas, is evidence that the party’s austerity-lite message was not tough enough. He said in a blog post: “We can seek to change the views of the public, but it’s best not to ignore them.”

Fair enough, you might think. Labour lost because it wasn’t credible on the economy and the reason it wasn’t credible was because the electorate thought Miliband would borrow and spend too much. If this was a game of Cluedo, the solution would not be Colonel Mustard with the lead piping, but George Osborne with the budget deficit.

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The conclusion, therefore, is simple. To avoid defeat in 2020, Labour needs to get back in tune with the electorate by showing that it too would balance the budget even if doing so means welfare cuts. The message from the party’s grandees is that the flirtation with Corbyn is all very well but it is now time to stop being silly. However, it appears the message is falling on deaf ears.

Why is that? Why are Labour supporters determined to resist the message from the 58% that say “we must live within our means, so cutting the deficit is the top priority”?

In part, it is because most Labour members have spent the past five years believing that there was no overspending or reckless borrowing in advance of the deep recession of 2008-09. Instead, they have always said the reason for the crisis was that the banks were too laxly regulated and in consequence were given licence to blow up the economy. They suspect that Andy Burnham, Yvette Cooper and Liz Kendall by and large agree, but have decided the line to take is that while Labour did not do anything wrong, political reality means they need to apologise anyway.



Corbyn is the only candidate sticking to the line that the banks were to blame and he is reaping the benefit. Not least because he is absolutely right.



Support for this argument has helpfully been provided by a recent House of Commons briefing paper from Matthew Keep. This looks at three separate measures of the public finances: the size of the budget deficit, the size of national debt as a proportion of the economy’s output (gross domestic product) and the percentage of GDP swallowed up by interest payments on the national debt.



None provides any support for the idea that Labour profligacy caused the crisis. Let’s start with the budget deficit. In the 10 years between Tony Blair’s election victory in 1997 to 2007, the year the subprime mortgage crisis broke, the average budget deficit was 1.4% – half the average under Margaret Thatcher and John Major. In 2006-07, the deficit was 2.6%.



Photograph: Guardian graphic

As for national debt, this stood at 39.9% of GDP when Gordon Brown became chancellor and was 36% when he succeeded Blair as prime minister.



Debt interest payments amounted to 2% of GDP, which was slightly up on the trough of 1.8% reached in 2002-03 and 2003-04, but lower than the Conservatives ever managed between 1979 and 1997.



The House of Commons analysis does not look at the interest rates the Labour government had to pay to finance its borrowing during the recession, but bond yields provide a clue as to whether the financial markets took fright at the rapid increase in the size of the deficit. There is no evidence that they did.



Photograph: Guardian graphic

Yields on 10-year bonds rose in the runup to the 2010 election, but only marginally, from about 3.75% to 4%. They would have shot up a lot higher had the markets seriously thought the increase in the budget deficit to 11% of GDP was the result of Labour going on a spending spree.

There is, therefore, scant evidence that it was Labour’s fiscal irresponsibility that caused the crisis. As Corbyn has rightly noted, people did not queue outside Northern Rock branches for three days in September 2007 because Labour was spending too much on teachers and nurses.

Photograph: Guardian graphic

It has been a catastrophic political blunder not to challenge the myth that Brown’s government caused the crisis and the austerity that followed. The choice, correctly framed by the economist Simon Wren-Lewis, is whether to pretend Osborne’s version of events is true and own up to perceived past mistakes or to contest it.

Pleading guilty seems the easier line to take, but it isn’t. The confession would be brandished by the government for the next five years as proof that Labour should never again be trusted with the public finances.

Instead, Labour needs to start its fightback by rehabilitating the record of the Blair-Brown years, making the point that the purpose of the pre-crisis borrowing was to modernise and improve the NHS and shabby schools. It also needs to challenge the idea that all borrowing at all times is bad. If that were the case, individuals would have to save up the entire asking price for a house rather than buying it on a mortgage and there would be no startup capital to launch businesses.

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Accordingly, the idea that “we should live within our means” is consistent with the government running deficits, provided that the borrowing is affordable and the benefits exceed the cost. It is hardly surprising that most voters agreed with the question posed in Labour’s inquest, but that is because it was put in such a way as to get that answer. The result would be different if the question was: “Do you believe that the government should borrow at historically low interest rates to invest in the railways or the NHS if that means it takes longer to balance the books?”

There are plenty of legitimate reasons for Corbyn’s rivals to attack him, for which there is not room in this column, but his approach to austerity is not one of them. Instead, he has come up with a version of the old political maxim – never apologise, never explain – that makes macroeconomic sense and is resonating with Labour supporters. He has explained what he would do – borrow to invest and have no set timetable for deficit reduction – while apologising for the right thing: Labour’s over-lax financial regulation. It is proving a better strategy than apologising for the wrong thing and not explaining.

