In Defence of Liberty

Driven by data; ridden with liberty.

Government Spending, Taxation and Deficits under Labour, 1997-2010

Labour’s record in government, particularly on the matter of public finances, often forms the background for today’s policies. Given its influence on political debates, it is necessary to gather facts and expel misconceptions. The Institute for Fiscal Studies have produced multiple documents on Labour’s period of office, examining trends in spending, taxation and deficits.

The size of government, measured as percentage of GDP, slid from 39.9% in 1996-97 to a trough of 36.3% in 1999-2000. From that year, the state slowly grew, before accelerating forward after the financial crisis to 47.9% in 2009-10. According to the OECD, the British state – in terms of total government outlays between 1997 and 2010 – expanded faster than any other developed nation.

Under Labour, spending on public services increased in real terms an average 4.4% per year, compared to the Conservative’s constrained 0.7%. The chief recipients were the health, education and transport budgets. Labour enlarged total public spending by more than 4% in real terms in more fiscal years than the previous Conservative government made rises in real spending over 2%, despite shorter time in Downing Street.

After erratic changes to government spending under the Conservatives, Labour delivered sustained increases in state spending. (Photo: IFS)

After erratic changes to government spending under the Conservatives, Labour delivered sustained increases in state spending. (Photo: IFS)

Tax Revenues Like Manna

Labour inherited a tax burden – net taxes and National Insurance contributions – of 34.0% of national income in 1996-97, after that tax measure peaked at 38.2% in mid-1980s. Despite the deleterious effect of the financial crisis on tax receipts, Labour left office with a higher tax burden that when the party arrived. In monetary terms, tax receipts arrived like manna, with an average real increase of 3.5% per year from 1997-98 to 2007-08. This made comparative increases under Conservative Prime Ministers, Thatcher and Major, of 1.9% and 1.2% respectively, seem percolated.  However, from 2008-09 to 2010-11, tax receipts dropped by 2.8% each year.

After receiving a budget deficit of about 3% of GDP from the Conservatives in 1996-97, Labour Chancellor Gordon Brown maintained his predecessor Kenneth Clarke’s fiscal restraints for two years, resulting in significant surpluses. Public sector net borrowing was essential zero in 2001-02, but was over 2% of GDP for every year after then. Total spending is the sum of investment and current spending, and the current budget deficit was only 0.3% in 2007-08. The national debt was 42.5% of national income in 1996-97, and since economic growth outstripped the accretion of new borrowing, it was 36.5% in 2007-08.

Whilst tax revenues fluctuated, state spending - both current and total - surged upwards, prior to the 2008 financial crisis. (Photo: IFS)

Whilst tax revenues fluctuated, state spending – both current and total – surged upwards, prior to the 2008 financial crisis. (Photo: IFS)

In the days before the financial crisis, Britain had the sixth highest structural borrowing level in the OECD countries, though the second lowest debt burden in the G7 nations, behind only Canada. Once calamity struck, the national debt, excluding bailouts of financial firms, exploded above its 1996-97 level by 2008-09, due partially to the sharp contraction in GDP. The national debt launched skyward, breaking the 60% barrier by 2010-11. In the fiscal year 2009-10, the total deficit nearly reached 12% of our national income: over half of that was structural; just under a sixth was a ‘stimulus’.

It is the nature of modern politics to simplify recent history. Labour’s effect on the public finances is not so crude.

Advertisements

3 comments on “Government Spending, Taxation and Deficits under Labour, 1997-2010

  1. Simon O'Kane
    June 21, 2013

    The graph shows that government spending as a proportion of GDP just before the crisis was not that much higher than it was before Labour entered office. The real problem is that governments and bankers around the world willfully ignored the signs that smaller organizations such as our University saw, allowing them to plan accordingly.

    • Anthony Masters
      June 21, 2013

      The cause of the financial crash was beyond the scope of the article. Government as a share of the total economy was declining as Labour entered office, which they temporarily maintained, then proceeded to strike combos of large increases in government spending.
      If the private sector was growing well during that period, these increases may be considered pro-cyclical, or rather, insufficiently counter-cyclical to the business cycle.

  2. Pingback: Upsides and Downsides | In Defence of Liberty

Comments are closed.

%d bloggers like this: