Despite much-publicized potential tax cuts in the spring budget, public finances remain in a dire state, reflecting the scars of both the pandemic and, going back further, the global financial crisis.
The Office for Budget Responsibility (OBR) expects government borrowing to be £123.9bn in the 2023-24 financial year, falling to £84.6bn in the 2024-25 financial year when a new government is expected to take power. I predict that it will. . Even if this year’s results come out better than expected, it will still be an enviable legacy for the next government.
The Institute for Fiscal Studies (IFS) said last week that the next government is likely to face some of the most difficult economic and fiscal choices the UK has faced outside of a pandemic, conflict or financial crisis.
The report says that while UK taxes are at record levels, the combination of high interest payments on the national debt and low growth will make it more difficult to reduce debt as a share of national income than at any time since the 1950s. are doing.
With NHS and education spending locked in, there could be substantial spending cuts elsewhere, making life difficult for whoever becomes Prime Minister next spring. -Increase defense spending in the face of geopolitical tensions, especially as there is growing evidence that the UK needs to tighten its policies.
However, the fiscal situation is improving, as OBR forecasts make clear. This largely reflects the fact that the government has attempted to maintain discipline in public spending while increasing taxes significantly.
Prime Minister Jeremy Hunt has the power to make life difficult for his potential successor, Rachel Reeves. Increasing spending or cutting taxes now would reduce Labor’s ability to deliver on its big-ticket pledges, particularly to invest £28bn a year in low-carbon infrastructure projects. Mr Reeves himself has said Labor will place greater emphasis on fiscal commitments.
But the language used by the IFS is impressive, especially given some of the dire fiscal conditions inherited by previous governments.
Economy handed over to new government
For example, the Coalition government received a terrible financial legacy: gordon brownLabor government to step down. In 2009-10, the last financial year before the Coalition government came to power, the budget deficit reached 10.1% of UK GDP, as the government’s tax revenues (particularly from the financial services sector) collapsed during the global financial crisis. This is the result.
Prime Minister at the time george osborneHis response was to implement the austerity program maintained by his predecessor. By 2018-19, the budget deficit had fallen to just 2% of GDP, before the pandemic upended the economy.
But the effects of that fiscal discipline are being felt in many areas, including the courts system, which, unlike the NHS, does not benefit from budget lock-ins.
Mr Brown himself benefited from a considerable financial legacy when he joined the Treasury following Tony Blair’s landslide election victory in 1997.
Since the UK left the former European Exchange Rate Mechanism (ERM) on ‘Black Wednesday’ on 16 September 1992, the UK economy has enjoyed uninterrupted economic growth, with a budget deficit of just 4% of GDP. It suddenly decreased to . .
The country’s debt, which now stands at 98% of GDP, was then just 45% of GDP. ken clark He handed over the reins to Mr. Brown. Not that the latter was particularly grateful. An STV camera crew recording Mr Brown’s first day in the Treasury caught him attacking a Treasury official who dared to point out to the new chancellor the advantageous situation he had inherited from his predecessor. A thank you letter? “
Mr Brown stuck to Ken Clarke’s austerity plans – which Mr Clarke himself later chuckled he would not have done had John Major won in 1997 – 2000-2001 By the financial year the British government was actually implementing fiscal policy. surplus. I haven’t done anything like that since.
Going back even further, when Margaret Thatcher was the first Prime Minister, S.ir Jeffrey Howejoined the Ministry of Finance in 1979, and tackling the budget deficit was one of the many challenges.
At the time, controlling inflation and addressing Britain’s chronic lack of competitiveness were at least as big a priority. Moreover, by the time Sir Geoffrey joined the Treasury, the deficit had fallen.
The turning point came in 1976, when, after the national humiliation of Britain receiving an IMF bailout, Prime Minister James Callaghan said at that year’s Labor Party conference: By increasing government spending.
“To be frank, that option no longer exists, and to the extent that it ever existed, it was possible to do so from time to time by injecting more inflation into the economy and then even higher inflation. “The next step is the level of unemployment.”
His speech was one of Britain’s post-war political moments, when the government faced the need to fight inflation.
It meant a difficult decision – and it’s fair to say: dennis healyAs a result, Mr. Callaghan’s premiership did not indulge in pre-election giveaways in 1979. He had no room for that.
gifts before election
In fact, pre-election giveaways are a relatively recent phenomenon.of the workers roy jenkinsThe first post-war prime minister to actually start repaying the national debt (something Gordon Brown and Nigel Lawson later achieved) could have paid off the debt in 1970, but the public had already received the following message: Assuming you had received a , you chose not to do so. The economy was recovering.
he was wrong. Fraudulent trade statistics and a shocking exit from the 1970 World Cup at the hands of West Germany led to Edward Heath’s unexpected return to power just days before the country went to the polls.
The legacy he left behind in 1974 was a meager one. anthony barberAs chancellor for much of the Heath government, he embarked on a so-called “dash to growth” that only led to a wage-price spiral and a surge in inflation. His two elections in 1974 were, in retrospect, good elections for the Conservatives to lose.
Among the worst legacies received by the next prime minister is the one Mr Callaghan himself received when Labor was elected under Harold Wilson in 1964. Reggie Maudlingwas entering a period of expansion, and the UK was running a large current account deficit (imports exceeding exports), putting pressure on the pound.
As Mr. Maudling left the Treasury, he told Mr. Callaghan: “Sorry, old cook, leave it like this.” He thought Mr Callaghan was referring to the situation in Downing Street, not the economy. Eventually Wilson’s government was forced to devalue the pound in his 1967 year.
Incidentally, it was Maudling’s quip about Mr Callaghan that prompted the outgoing Chancellor of the Exchequer, Liam Byrne, to leave a memo to his successor in 2010 saying, “Unfortunately we don’t have the money.”
Therefore, while it may appear that the next government will face a tough fiscal inheritance, the previous government has inherited much as well.
