Summary
Neither the current Labour government nor the previous Conservative one can
look back over their respective terms of office as periods of great success in
fiscal management. Both started by strengthening their underlying budget
balances for three years after taking office, but both then allowed them to drift
steadily back into the red. This meant that they were already borrowing
significant amounts when the onset of recession required them to borrow more.
Labour is entering this recession with a similar structural budget deficit to the
one that it inherited from the Conservatives, but with a smaller underlying debt.
It remains to be seen whether the structural budget deficit will deteriorate as far
under Labour as it did under the Conservatives, but debt is very likely to rise
above the peak it recorded under the Conservatives (even without the impact of
recent bank nationalisations and recapitalisations).
Labour recorded a similar structural budget deficit in the year before this
recession to that which the Conservatives recorded in the year before the last.
However, the structural deficit appears to have deteriorated more sharply in the
early phase of the downturn than it did under the Conservatives and as a result
is set to be higher in the first year of recession than it was under the
Conservatives. This largely reflects the particular impact of the credit crunch
and falls in the stock market and housing market, rather than budget decisions.
Labour is also going into the recession with a significantly higher level of debt
than the Conservatives did.
Turning to the international context, we are entering the current recession with
one of the largest structural budget deficits in the industrial world and a debt
level that may be among the smallest in the G7 but which is larger than that of
most industrial countries. We have done less to reduce our structural budget
deficit and less to reduce our debt than most other industrial countries since
Labour came to office
