Labour’s time in power can be divided into three periods, as far as the public finances go. First, borrowing was reduced to zero and below, cutting the national debt from 42.5% of GDP in 1996/97 to 29.7% in 2001/02. Then, a period of borrowing 2.3-3.3% of GDP a year, raising the national debt to 36.5% of GDP in 2007/08. And finally, all hell broke loose.
It’s the middle six years that are now the most contentious, when the government ran deficits that weren’t huge but were still on the large side given that the economy was doing well.
That said, there was a world economic slowdown around 2001-03, and the fiscal stimulus that resulted from extra borrowing probably helped the UK come through in pretty good shape. Indeed, Chris Dillow goes further, arguing that the longer pre-crisis period was one where government spending was an important prop to the economy – tighter fiscal policy would have meant less growth and potentially a bigger housing boom if interest rates had been cut to compensate.
It’s also debatable how much less bad things would now be if we’d gone into the crisis with a balanced budget rather than a 2.4% deficit. We could have had a bigger stimulus (and, hopefully, a smaller recession), or had the same stimulus with less borrowing overall (so smaller interest payments and, hopefully, slower spending cuts now) – which would have been better. But the flipside of going into the crisis in better fiscal shape, as Chris argues, is that we might have been in worse shape in other ways.
But there is one sense in which Gordon Brown unarguably got it wrong.
This graph shows government revenues relative to GDP (thick black line) compared with a series of Brown’s Budget forecasts (dotted coloured lines):
Year after year, Brown predicted the Treasury’s income was about to rise to 40% of GDP and above; in reality, it never even reached 39%. Now, public borrowing is hard to predict, and so a couple of years of undershooting is acceptable margin-of-error stuff. But by, say, 2004, it must have been clear that something was wrong with the forecasting assumptions: the money consistently wasn’t appearing as expected.
Brown should have rethought his tax and spending plans or at the very least his predictions. After several good years, the Treasury had – like the financial sector – become optimistic to the point of complacency. And so, as they don’t like to mention, had the Conservatives, who in 2007 signed up to Labour’s spending plans for the following years.