User:Nick Gardner /Sandbox

Insert text as required

The public finances: 1997 to 2010 Robert Chote, Rowena Crawford, Carl Emmerson and Gemma Tetlow1 http://www.ifs.org.uk/bns/bn93.pdf

By 2007–08, the public finances were in a stronger position than they had been when Labour came to power in 1997. Though public spending increased from 39.9% in 1996–97 to 41.1% in 2007–08 (an increase of 1.2 percentage points), over the same period revenues grew by 2.3 percentage points, meaning that total borrowing fell by 1.0 percentage point over this period (figures do not sum due to rounding). With more being spent on investment in 2007–08 than in 1996–97, the current budget (that is, the difference between current revenues and spending on non-investment items) strengthened even more – from a deficit of 2.7% of national income in 1996–97 to a deficit of just 0.3% of national income in 2007–08. Meanwhile, public sector net debt fell from 42.5% of national income to 36.5%, as the UK economy grew faster than the accumulation of new borrowing

By 2007 Labour had reduced public sector borrowing slightly below the level it inherited from the Conservatives. And more of that borrowing was being used to finance investment rather than the day-to-day running costs of the public sector. Labour had also reduced public sector debt below the level it had inherited. As a result the ‘golden rule’ and ‘sustainable investment rule’ that Gordon Brown had committed himself to on becoming Chancellor in 1997 were both met over the economic cycle that he eventually decided had run from 1997–98 to 2006–07.

The Code for Fiscal Stability, which set out the broad principles of fiscal policy, as well as requiring the Treasury to be transparent about its goals and record; and  Publicly stated fiscal rules, which turned broad principles of ‘sound’ fiscal policy into specific operational targets against which success or failure could be judged. These were: o The golden rule, which required the public sector to borrow only to pay for capital investment. This was judged on average over the economic cycle, rather than every year. The sustainable investment rule, which required the Government to keep the public sector’s debt (net of its short-term financial assets) at a ‘stable and prudent’ level. The Treasury defined this as less than 40% of national income (GDP) at the end of each financial year of the economic cycle.

The total budget surplus reached 1.9% of national income in 2000–01, comprising a structural surplus of 1.1% of national income and a cyclical surplus of 0.8% of national income. Meanwhile, public sector net debt fell from 42.5% of national income in 1996–97 to 30.7% of national income in 2000–01

Within the confines of its own definition of the start and end dates of an economic cycle, the Government complied with its fiscal rules over the one and only complete economic cycle that it judged had taken place prior to the economic crisis – that is, the one which ran from 1997–98 to 2006–07. But in the November 2008 PBR it conceded – with some understatement – that it would not meet them over the next cycle: “the Government will depart temporarily from the fiscal rules until the global shocks have worked their way through the economy in full”.

Mr Brown had described his determination to reduce borrowing in Labour’s early years in office as ‘prudence for a purpose’.10 The purpose became clear after 1999. The Government reversed its earlier cuts in public spending, with health, education, and lower-income pensioners and families with children the main beneficiaries.11 However, as spending rose (by 3.8% of national income over Labour’s second term, as shown in Figure 2.1), tax revenues weakened unexpectedly when the stock market fell in 2000 and 2001, reducing tax payments by financial sector firms and their employees. The first Budget after the 2001 general election contained significant tax raising measures which were designed to help reverse the decline in revenues and finance increased spending: in particular on boosting the incomes of lower income pensioners, lower income families with children, and to increase spending on public services. The largest tax raising measure – an increase in National Insurance contributions – was rhetorically hypothecated to increased spending on the National Health Service. Further tax raising measures followed shortly after the 2005 general election to boost revenues further.12 But other factors – such as the weak performance of the stock market that was associated with poor performance in the financial sector – offset these increases. By 2007–08, government revenues were 38.7% of national income – approximately the same level they had been in 2000–01. However, over this same period, spending had grown consistently as a share of national income – from 36.8% of national income in 2000–01 to 41.1% by 2007–08. The failure to match this higher spending with commensurately higher tax revenues unwound the improvement in the public finances seen during Labour’s first term. The current budget balance moved from a surplus of 2.4% of national income in 2000–01 to a deficit of 0.3% of national income by 2007–08 (and was even higher in 2004–05, at 1.6% of national income). As the economy moved from operating at its trend level in 2000–01 to slightly above that level in 2007–08, the deterioration in the structural position of the current budget was even worse: from a surplus of 1.6% of national income in 2000–01 to a deficit of 0.6% in 2007–08. The swing in the overall budget balance was even larger, reflecting the fact that public sector net investment had at last begun to increase. The return to sizable overall budget deficits began to push public sector net debt up again, reaching 36.5% of national income in 2007–08. Some of this deterioration in the public finances resulted from weak performance of tax revenues that was unanticipated by both the Treasury and most independent observers. However, some of the deterioration reflected excessive optimism in the government’s fiscal projections, which the government used to justify its decision not to raise taxes further. Between 2002 and 2007, the Treasury’s initial forecasts for borrowing were consistently lower than borrowing actually turned out to be. This did not solely reflect unforeseeable events; even at the time many of these forecasts were made, external observers believed that the Treasury was being unduly optimistic. Particularly in the run-up to the 2005 election, IFS and other commentators argued that the government would Tax and benefit reforms under Labour James Browne and David Phillips http://www.ifs.org.uk/bns/bn88.pdf The main changes to income tax since 1997 have been: • a reduction, in stages, in the basic rate of income tax from 23p to 20p;2 • replacing the 20p lower rate with a 10p starting rate in April 1999, but then abolishing this for non-savings income in April 2008; • the introduction of a new 50p rate above £150,000 and the withdrawal of the personal allowance from those with high incomes from April 2010; • the abolition of the married couple’s allowance for those born after 5 April 1935; • the abolition of mortgage interest tax relief for owner-occupiers (known as MIRAS). In April 1999, the 20p ‘lower’ rate of tax was replaced with a 10p ‘starting’ rate of tax on a narrower band of income