Chote, R.; Emmerson, C.; Tetlow, G.; (2008) The UK public finances: ready for recession? (IFS Briefing Notes BN79 ). Institute for Fiscal Studies: London, UK.

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Abstract

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.

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