There has been much written about the UK budget deficit which has a stranglehold over the entire political debate in Britain. It dominates the discussions over the economy, social policy and growth policy.
The political discourse is dominated by the orthodoxy that there was a massive structural budget deficit in the UK at the last election (2010), and that this is as a result in large part to the Labour government’s spending plans.
So is this the case?
Well lets look at the facts. If we strip away the politicking from the right or left, what was the budget deficit that Labour’s spending decisions were responsible for.
If we are to look at the real structural deficit, simply as a result of the Labour governments spending decisions, we need to go back to before the financial crises hit, in 2007. This is before the run on Northern Rock and before the bank bail outs and the recession which has led to the tax take decreasing substantially.
At the time the banking crises began to hit the world in 2007 the level of deficit in the tax year 2007/08, in other words the difference between the tax take and the amount spent by government, was 2.7% of GDP and £38.7 billion. In 2006/07 it was 2.6% of GDP. (ONS, 2008)
General government debt, the amount in total we as a country actually owe in total was £614.4 billion in 2007/08. (ONS, 2008)
This figure is not considered reprehensible or beyond any tolerance levels for a developed economy either in historic terms or in purely economic terms.
Governments are not like households, but more like blue chip companies who have long track records in borrowing money in order to invest in the future growth of the economy. Some would call this “credit” rather than “debt”, as our economy is built on a growth model which creates money through credit, to invest and grow.
It can be argued politically that not all the 2.7% was investment. But even if it wasn’t, this amount of deficit is by no means out of control.
Within the European Union there are agreed levels of debt that should be adhered to. The Maastricht Treaty’s Excessive Deficit Procedure sets deficit and debt reference levels of 3 per cent and 60 per cent respectively for all EU countries. The UK’s compliance is assessed on a financial year basis. The debt measure used under the Maastricht Treaty does not take account of assets held by general government.
Another figure quoted is the cyclically-adjusted deficit used by economists. This was stated in the 2007 pre-budget report as being 3.1%. The OECD also published a report stating that under Labour the cyclically-adjusted deficit had grown in its time in office by 1%.
The graph below shows the historical data of the UK debt.
Below is a graph showing the percentage of that debt, and how it is projected to grow.
Now to put this into context we can see how tax revenue and government spending have conspired to cause the economic problems we are in now.
It can be seen quite clearly that the relationship between tax revenue and government spending were matching pace until the financial crises hit, and were within the tolerance levels of the Maastricht criterea of 3% deficit as a share of GDP.
What we can see with these economic facts are that, yes government spending was higher than the tax revenue, but within responsible levels and was not out of control as claimed by the coalition.
However, it is also not true that there was no structural deficit as claimed by Ed Balls before Christmas 2010.
There is a debate as to whether the deficit was even as bad as these figures suggest as Labour would say that they were investing rather than simply spending tax revenue, on such things as capital spending programs, which increase GDP, provides skills and jobs and infrastructure enhancement. However, this is not really the point.
Since the financial crises hit in late 2007 – 2008, tax revenues have plummeted making the government spending plan unaffordable.
However, it is also worth bearing in mind that the Conservative Party had a specific pledge to maintain Labour’s spending plan before the financial crises began. (BBC website, 2007)
The real debate is not how much Labour was spending prior to the recession, but what we do now and what is the most equitable way of dealing with the deficit.
There is no doubt that the deficit is now way above the 3% tolerance set by the EU. Although in the short term this is acceptable due to the effects of a recession, it cannot go on indefinitely.
There are political choices to make, like who pays more taxation, and what gets cut.
The Labour party will not tell us any details regarding a plan for spending cuts. This is not surprising as they have just lost an election and there is no reason for them to do so. After the 2005 election it took David Cameron two years to come up with any policy initiatives at all, and if they were in opposition they would not be announcing spending cut plans.
There is also no doubt that spending cuts are not the only consideration. Over time, the government debt will be dealt with via inflation and growth in the economy. If we have no growth, tax revenue will not recover.
So we are walking the economic tightrope as discussed in a previous post http://bit.ly/eJ29mI
At the end of March 2010 general government debt was £1000.4 billion, equivalent to 71.3 per cent of GDP, far higher than the 60% quoted by the EU and the deficit is 11.4% of GDP.
The problem is not the spending of the last government, which George Osborne agreed with, hence their policy to match spending plans, but the effect of the financial crises, caused in large part by the lack of regulation of the banking sector.
The sooner the Conservative/LIBDEM Coalition stops just blaming the Labour party and deal with the structural issues of the banking sector the better.
Global Finance website, (2010), Public Deficit By Country, [online], available at
Gold Switzerland website, (2010),Hyperinflation will drive Gold to unthinkable heights, [online], Gold Switzerland website, available at http://goldswitzerland.com/index.php/general-commentary/
BBC website, (2007), Tories to match Labour’s spending, [online], available at http://news.bbc.co.uk/1/hi/uk_politics/6975536.stm
ONS website, (2008), [online], available at