LIE 2: THE ECONOMY

‘There was a global financial crisis that caused the deficit to rise’

THE contention that global factors were behind the budget deficit left by Labour in May 2010 bears little resemblance to reality.

The spending splurge in the party’s second term gained momentum under Gordon Brown – and meant public finances were already under pressure when the economic crisis hit in 200 .

In 1997 Labour pledged to be prudent with public finances, which it said would be controlled by two tests: firstly, that the government would borrow only for capital investment such as roads, not for current spending such as welfare payments; and secondly, public sector debt would be kept at a ‘stable and prudent’ level.

In reality, Ed Balls and a Treasury team including Ed Miliband moved the goalposts to allow more spending, borrowing and debt.

The independent Office for Budget Responsibility has noted Labour ‘increased public spending significantly as a share of GDP in the mid-2000s, arguing it would be paid for by an increase in tax receipts that did not fully materialise’.

As the Organisation for Economic Co-operation and Development said, ‘the UK entered the financial crisis with one of the biggest structural deficits in the industrial world. This limited the government’s room to manoeuvre.’

Labour’s borrowing forecast in 200 , just £3 billion, ballooned to £99.4billion by the end of the year. Current spending climbed from 37 per cent of GDP in 1999 to 42 per cent in 2005-06. The government’s debt mountain also rose sharply.

Seeds were sown in the party’s second term when it announced multi-year increases in public spending on the tax credit system, education and the NHS.

According to the OBR, Britain was one of a handful of industrial nations to see ‘an increase in general government debt as a share of GDP between 2004 and 2007’. It meant Britain was one of the least well placed to deal with the crisis.

Public sector net borrowing rose to .5 per cent of GDP, ‘the sharpest two-year increase since World War II’, the OBR said. At the heart of this catastrophe, with which we are still living, were Labour’s lavish spending plans in the 2007 spending review, adhered to even after the failure of Northern Rock that year and Lehman Brothers in 200 .

ALEX BRUMMER

CITY EDITOR