Government debt under labour 1997-2010

If I got a pound for every time someone said ‘it was debt that got us into this mess in the first place’ I could have made a significant contribution to bailing out the Irish banking system. Usually, when people say ‘it’s debt that got us into this mess. They tend to view all types of debt as the same – equating government debt to financial debt incurred from selling sub-prime mortgages in the US. However, this is deeply misleading. The consequence of bad debt defaults in the financial system, is very different to government debt financed through selling bonds.

Firstly, to what extent did the Labour government really plunge the economy into debt during 1997-2007?

Government debt

debt-under-labour

In 1997, public sector debt as % of GDP:

  • 1997/98 – 40.4% of GDP
  • 2007/08 – 36.4% of GDP
  • 2010/11 – 60.0% of GDP.

At the start of the great recession in 2007, public sector debt had fallen from 40.4% of GDP to 36.4% of GDP. This was despite increased real government spending. After the start of the crisis, public sector debt almost doubled in the space of three years.

If we look at just actual government debt, there is a significant increase.

In 1997, total public sector debt was:

  • 1997/98 – £352 bn
  • 2007/08 – £527 bn
  • 2010/11 – £902 bn

public-sector-debt-total-hmT

Debt to GDP statistics were helped by the period of strong economic growth – a reminder that economic growth is as important at debt levels. It is also worth bearing in mind UK public sector debt in comparison to the post war period.

UK national debt

Even public sector debt of 60% of GDP is quite low compared to the historical average of public sector debt in the UK during the twentieth century. The very high period of debt in the 1950s was not a barrier to economic expansion.

Budget Deficit

The level of Net government borrowing at 2011/12 prices

  • 1997-98 – £ 7.8 bn
  • 2007-08 – £ 40.3 bn
  • 2010-11 – £ 145.1 bn

net-borrowing-96-12

Government borrowing as a % of GDP.

borrowing-percent-gdp-69-14

Commentary

At the start of 2007, there were few economists expressing concern at government borrowing running at 36% of GDP. By post-war standards, UK government debt was low and the government appeared to be meeting its own reasonable fiscal targets.

Given the period of strong economic growth, it is unsurprising that Labour wished to increase spending on health care and education. If the financial crisis hadn’t materialised, we may have looked back on the great moderation with kinder eyes.

However, a critic would point out that we did have a financial crisis and running a budget deficit during an unsustainable economic boom was irresponsible. In retrospect, Labour would have been better reducing the public sector debt further. This would have given the government even more room for manoeuvre during the crisis of 2008-12. Also, with growth strong, this was the best time to reduce the budget deficit. The mantra of Keynesians during the crisis has been – a recession is the wrong time to reduce a budget deficit. Given high growth in the 2000s, it would have been better to be stricter with public spending. Even counter cyclical fiscal policy measures such as higher income tax, higher stamp duty may have reduced the housing and financial bubble and made the subsequent crash less dramatic.

This is a fair point. It was a mistake to be running budget deficits of 3% of GDP towards the end of the boom. However, the mistake is relatively minor. The boom was in finance and housing; inflation was running low (unlike saw the 1980s boom) Most of the economic profession never saw the extent of the forthcoming recession. From a macro perspective it didn’t look like a  classic boom and bust (high growth and inflation)

Of course, it is easier to be wise after the event. If we were more aware of the dangers inherent in the financial system, we should have exercised much more caution. But, when looking at the causes of the great recession – government spending levels and budget deficits of the preceding years bare little, if any cause.

It is also worth noting that when the recession hit, the government did initially pursue expansionary fiscal policy – there was no panic in the bond market. Bond yields have fallen throughout the crisis. Although debt increased rapidly, there was no danger of a fiscal cliff, like say Greece.

The switch towards austerity post 2010 was largely a self-created panic. Part of the motive for austerity was the desire to paint a grim picture of public finances. The problem is that economic pessimism can become self-fulfilling. A more balanced view of the overall state of public finances in 2010 would have led to less rash policy.

Related

14 thoughts on “Government debt under labour 1997-2010

  1. Rubbish. Labour halved our manufacture and invested in bankers. These were lean years for many a small business and Brown ran a deficit from the second election on. This meant pro-cyclical rather than counter cyclical budget deficits. Inflation was hidden by a move to CPI rather than RPI, and a yawning trade gap with cheap foreign imports. There was no real net growth after 2005 because it was all built on increased public and private borrowing. Brown borrowed into the future too, expecting receipts to continue rising. This is partly why public spending has increased so much since – we still have an overbloated public sector with record pay levels, growing debt and deficit, and NO economic growth. Brown created the illusion of prosperity but by ditching manufacture, he ensured we will not recover for a long long time. Had we gone the Balls route, our debts and deficits would be even greater.

    1. You just cannot accept labour are better managing the economy than tories , history prove it the tories always run higher debt !

      1. Levels of debt, on their own, are not a very good way to evaluate economic performance. Public sector debt (including debt to GDP) under the Conservatives government 2010-16 is significantly higher than the previous Labour government, but on its own this means very little.

      2. Well said, the Tory PR machine did a really good job in persuading the public that Labour were bad at economics. The evidence shows otherwise.

    2. New labour Have spent 13 years running up
      gigantic debts in the NHS , amounting to hundreds of Billions of pounds of outstanding PFI debts ,as well as the debts inside HM Treasury.

    1. In 13 years from 1997/8 to 2009/10, the Labour Government increased debt by about £420 billion. In the 5 years from 2010/11 to 2014/2015, the Coalition Government will increase debt by about £600 billion. These are the facts.

      1. Remember for the first 4-5 years of new government you are committed to previous government spending, the first 4 years of labours government benefitted from Tory plans, similarly Labours spending commitments don’t stop as soon as they left government in 2010.

        1. What about after 6-10 years then? Hammond has said we will be 1950 billion in debt in 2 years time = 90% of GDP.
          So Labour were crucified for debt rising from 352billion to 902 billion, under this lot it will rise by more than a trillion.
          Tories have bullshitted all of us into believing they know best.

      2. But Labour had a Global Credit Crash which Tories did not have. Tories created the biggest list of millionaires and billionaires in the world while they introduced austerity bringing people to starvation and suicide. Now they are determined to break the NHS to introduce private insurance like USA. No concern to them because they have it already and write it off on expenses which we pay.

  2. Also New labour have given the City of london £425 Billion of Spending power called quantatative easing , which
    has made financiers enormous fortunes .

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