I’ve blogged before on the totally facile nature of the debate about the deficit in our politics – though that post concentrated on the wide gaps between rhetoric and reality on what different political parties planned to cut, and particularly the Labour party’s new-found opposition to cuts which it planned to make.
The debate has moved on recently to what actually caused the deficit to be so large – yet it remains as facile as ever.
So what actually did cause the budget deficit?
Was it Labour profligacy pre-recession? Was it the world-wide financial crisis that began in 2007? Was it over-reliance on unsustainable tax revenues?
In truth, it was a combination of all of these things.
Britain entered recession in 2008 with the government already spending more than it was taking in in tax. In 2007 Britain had a structural budget deficit (i.e. the deficit not caused by the effect of recession) of 3.1% of national income (on the OECD measure). This was the second largest budget deficit of the G7 countries, and the fourth highest of the 26 industrial countries for which the OECD collects data.
Clearly, then, spending was too high (or taxes too low) before the recession began. However that does not go all the way in explaining the size of the budget deficit now.
What role did the financial crisis, and consequent recession, play in increasing the deficit?
In any recession, the budget deficit increases because of the ‘automatic stabilisers’ that kick in – tax receipts fall and welfare spending increases. However this part of the deficit is cyclical rather than structural, meaning it will disappear once the economy recovers, and therefore doesn’t require action by the government to reduce it. So this direct effect of the recession is rather a moot point in debates about the deficit.
However there was an indirect consequence of the financial crisis and recession that greatly increased the size of the structural deficit: the substantial fall in certain tax revenues, namely those from the financial and housing sectors.
Clearly the UK economy as a whole was over-reliant on financial services and a booming house market, and the same can be said of tax revenues. Britain’s tax base was so reliant on these sectors that when they experienced the downturn which many warned was inevitable, government finances took a serious hit. And more to the point, this is tax revenue that is unlikely to return now the economy is growing – it was revenue from an unsustainable bubble which burst in 2007.
So who is to blame for the deficit, then?
Whatever Ed Miliband’s claims, the Labour party clearly have to take a significant share of the responsibility. Firstly because the government was spending more that it was taking in before the recession, clearly putting the UK in an unusually bad position (by international standards) when the recession began.
And secondly – and more significantly – because they assumed they had done away with the business cycle – they believed they had “abolished boom and bust” – when actually the truth was that Britain was living through an enormous boom, and consequently underwent an enormous bust in 2007.
This rather arrogant belief led Gordon Brown to spend as if the the boom would go on forever, when of course it simply could not. But let’s not forget that David Cameron, pre-recession, had pledged to stick to Labour’s spending plans, and therefore seems to have believed Mr Brown’s rhetoric. In comparison, and as we all know, Vince Cable had warned that the boom we were living through was clearly unsustainable – and he was not the only one.
The Labour government seemingly failed to anticipate even the possibility that Britain might enter recession, and this was their biggest mistake. It was simply irresponsible of Gordon Brown to spend like the economy would grow at such a high rate indefinitely, and to base his spending plans on a tax base which was as unsustainable as the boom itself.
So while it might be true that Labour’s spending in itself did not cause the bulk of the deficit, it is simply untenable of Ed Miliband to argue that Labour’s decisions played no part in causing the problem, when they quite clearly did.
Nick Thornsby's Blog 
over generations Liberals have been tagged Mudge and Fudge
and this diatribe is a perfect example – you want to blame Labour
totally but your thesis is wrong You would have been better to go
back and examine the crash of 1987 – ie black monday 19 october
that year- that was on the back of a boom with a conservative
government in its 9th year – No one suggested they were
overspending , but one consistency with the 2008 bust was the spivs
in the city- gambling away Yes Labour overspent and any government
is ultimately responsible but the shrinking of the labour market –
and the subsequent reduction in tax take which you and your tory
partners are intensifying is just going to increase the pressure on
the social fabric of the country – something you sadly seem
prepared to ignore
More smoke and mirrors. The fact of the matter is that
capitalism inevitably results in boom and bust. Capitalists,
economists and bankers know this so they try, as individuals to
amass as much wealth as possible during the boom to insulate
against the inevitable bust. This either means or results in high
prices, low wages and inflation and unemployment. Another fact is
the poor did not cause this deficit. They do not have the means to
create or insulate against the bust. Yet this government expects
the poor to bear a disproportionate and unjust share of the debt.
Tax the £7 billion the bankers intend to award themselves at 90%.
Remove the 50% tax band. Replace it with 70%. And if the bankers
don’t like it and go abroad, then tell them leave your passport and
don’t slam the door on the way out.
Nick, the deficit (as opposed to the debt, and Labour spin has successfully fogged the difference) problem goes back to 2004 & Gordon Brown’s decision to throw money at the NHS without funding the increase from taxation.
Well said, Frank H Little. Most folk are unaware of the difference between the national debt and the deficit. The only inaccuracy in your post is this fogging of the truth goes back to 1066 when Saxon law was superseded by Norman law. Take a look at the House of Lords. Hereditary lords in the main are of Norman heritage. The rest are of ar*e licking heritage. The point being the system was and continues to be based on divide and conquer. Rich versus poor. Haves and have-nots.
LibDems claim to want a change in the system- a fairer system. Therein lays the catch. Your fairer system is my biased system.
The truth is history tells us how and why money = power. History, if you look back far enough also tells us how we can have an altruistic society where money is not the be-all-and–end-all. In fact, I refer to a society where there is no money. Where we work for each other, to the benefit of each other, therefore to the benefit of us all.
And if anybody thinks it cannot be changed, here’s a quote from my university lecturer who is currently teaching us networking with WANS and LANS- ‘amateurs built the Ark. Professionals built the Titanic.’ (Francis Matule)
How do you know politicians are untruthful, when their lips move.
May be truth in the old adage?
There again truth is the point really isn’t it?
Smiling Carcass – I hope you would say it reasonable to presume you have quite strong political views. It must make it hard to choose who to vote for. It seems like your fairly rabid dislike for the reasoned political arguments of this well-informed blogger would best be solved by voting for this party: http://communist-party.org.uk/
Then you could take part in a democratic movement towards what you obviously believe to be best; a society without money. But I recommend not trying to defend Labour as their recent record of radical socialism along the lines you describe is really quite lacking. Of the other two large political parties, I doubt the Tories would really be to your liking, being spawn of Lucifer tainted with a demonic craving for the evils of trade and traditionalism. Therefore the only party left (!) is a fairly small one. It doesn’t have a snappy and revolutionary name like Labour but it was formed in part by Social Democrats; the thinking man’s Bolsheviks. Their record, unfortunately, in civil rights is nothing like as atrocious as the previous government’s and they are far less centralised and authoritarian by ideology than what you might endorse. Unfortunately though, I’m sure they won’t be to your liking as, by spending time trying to placate raging right-wing Tories, they obviously run contrary to your partisan view of the simplistic dichotomy of all capitalist societies, and have naturally been tainted by the blood of Beelzebub.
Forget it then. Best to stay at home for the elections. At least then you can win a shouting match with the telly.
Nice post.
Labour messed with capitalism and lost.
They tried to stop boom/bust, and in the process generated the biggest boom followed by the biggest bust ever recorded.
Then, they went ahead and spent all the money on making the poor richer (an admiral aim), without really making the rich poorer (was never going to happen).
What does that kind of spending equal – deficit.
And if people dont beleive the poor are richer:-
How many people int he 90’s were living on benefits, and could still afford Sky TV, 2 cars, their own mortgaged house and foreign holidays!!!
What you have to say makes some sense but who knows whether this is right or not. You were able to form a government in coalition with the Tories, in no small part, due to the young vote. These were a section of the community you wholly decieved into believing you would stand by them in relation to student fees. A promise you have walked away from like a bad smell.
If you cant get your research right in relation to setting out your manifesto who the hell knows what else you will just make up.
It seems to me that Labour have a place in government to look after the social well being of ther population. Once the the country has gone broke the Tories step in to put the books right and when their policies get a bit harsh Labour take the reins back and the cycle goes round.
I can see no place for the Lib Dems in all of this especially when you cant even set out a truthful manifesto.
i agree and you say something different to what the coalition say or want the people to beleive. They say the structural deficit is 8% (4% cyclical deficit) and its caused by labour overspending at what £90bn a year since say 2002 or so. This gives people the misleading impression that labour were VERY bad at controlling spending. This is not the case!
Actually the strucural defict caused by govt overspend is only 3% of which 1% was borrowed to invest leaving only around £25bn a year overspend which although it is an overspend, is barely any different then throughout most of uk history govts! If that hadnt happened it would only be enough to stop six months worths of cuts or one year under labour’s plan…significant but a drop in the ocean really!
The other 5% comes from a reduction in the long term growth rate potential of the economoy so it is really a cross between the cyclical and strucutral deficit and this is the majorty of the deficit. This part is caused by labour error, but not by labour “overspend” but by attemtping to operate an economy on financial services which artifically inflated the currency, making exports close to impossible and forcing the uk out of cync. Yet from what i heard, labour have owned up to this mistake which was there “big mistake”. It is this that is the root of the problem but the coalition (also the conservatives agreed with the ecnomic model labour had followed after all it was thacture that first started it!). I agree though that labour should own up to the “overspend” but thaty means they can put it in the context i described above.
With strikes in Europe and soon to hit the UK this really is an issue that should be discussed more often as UK debt as a % of GDP increased by almost 40% in the last 4 years and although many including the unions believe we can spend our way out of it i seem to remember we once had one of the main causes of this situation using the word prudence! Whether the public like it or not the government just like an individual needs to balance the books or eventually the inevitable will happen. Not sure if it ok to put a link up but interesting article as shows the deficits for all european countries too with latest Eurostat figures.. http://abehnisch.com/eu-public-debt-crisis/
Any bets on who may need a bailout in 2012?
@ Jonathan Rubicon
Quite right; I do have strong political views. But those views make it easy to decide who to vote for, by a process of elimination. As for the ‘reasoned political arguments’ Nick is entitled to his view and I think he understands mine are very different. He often responds to my posts and it is not necessary for a third party to join the debate and not discuss the topic in hand- the deficit.
So thanks to the link to the Communist Party; not that I need it, but thanks anyway.
And why is it you assume I might have a dislike for trade and traditionalism? I have a great liking for trade- it employs people- or used to until Thatcher closed the pits, destroyed the steel and manufacturing industries and replaced them with ‘loadsa money’ yuppies for a political and vengeful ideology. It is not trade, or money or profit that is evil or wrong. It is the people that control it and the uses to which it is put.
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