The UK’s deficit was caused by high Government spending
The view that the deficit was caused by the profligacy of the previous government is gaining currency. ConDem Ministers and their media supporters argue that the previous government should have ran surpluses in the good times and that continuing to spend in the bad times was irresponsible.
It is a perfectly respectable intellectual position to argue that the Government should have ran surpluses when growth and employment were strong. This would have had little impact on the deficit (which was caused by the collapse in tax revenues and rise in social spending during the recession caused by the global financial crisis) but would have had an impact (how much would depend upon the scale of the surplus and whether the government had used its stronger fiscal position to implement a bigger stimulus during the recession) on the stock of debt.
However, some pertinent factors have to be considered:
• International comparative position – on the cusp of the global financial crisis, the UK’s deficit was above the OECD average (2.7% of GDP compared to 1.2%) but the stock of UK gross debt was low (47% compared to an OECD average of 73%). It is worth noting that some of the countries with the worst fiscal position in 2009 were running surpluses in 2007: Ireland (went from surplus of 0.1% to deficit of 14.3% in two years), Spain and Iceland;
• Spending during the crisis – the discretionary stimulus implemented by the Labour Government during the recession was comparatively small in scale and short in duration – 1.5% of GDP compared to an average of 3.4% across other advanced nations; the UK and Argentina were the only G20 countries to withdraw stimulus during 2010;
• View of markets – that great arbiter of fiscal rectitude, the financial market, were funding UK debt at historically low levels during the boom; and,
• Addressing historic under-investment – Labour’s spending helped to address the effects of long-term under-investment in schools, hospitals, infrastructure and the public sector workforce.
Of course, must be remembered that when in opposition George Osborne had committed to maintaining Labour’s level of public spending if and when the Conservative’s assumed office.
Don’t take our word for it!