Black hole or surplus? Labour's deficit plans

Published: 30th Mar 2015

"Labour yesterday admitted it will borrow billions more than the Tories—as experts warned the party's plans would leave a £30 billion black hole at the heart of the nation's finances."

The Daily Mail, 30th March 2015

It seems hard to reconcile this Daily Mail leader with the Labour Party's own press releases.

"We will balance the books: getting the current budget into surplus and national debt falling as soon as possible within the next Parliament."

Labour Party website

One gives a £30 billion "black hole", the other a surplus and falling debt. But both of these statements are completely consistent with each other.

Labour have pledged a surplus on the current budget—which means that government revenue should cover day-to-day spending on things other than investment on things like buildings and roads.

Spending on investment over the next parliament is estimated to be about £30 billion each year. So if the current budget surplus is small and no cuts are made to investment spending, the deficit will be around £30 billion each year.

How does this fit in with falling debt? Labour's target is actually to have debt falling as a proportion of GDP. We're already forecast to have net debt as a proportion of GDP falling in 2015/16 despite the government running an overall deficit. This is a temporary reduction because the government is selling assets.

If the economy grows fast enough, then debt as a share of GDP can fall without asset sales, and while the government is running a deficit.

Labour are committing to a lower reduction in the deficit than the Conservatives. This means that while they've committed to cuts in 2015/16, they can cut less—or tax less—over the rest of the next parliament.

The rationale behind Labour's target is simple: borrowing to invest isn't the same as borrowing to spend. Good investments in infrastructure can lead to a stronger economy tomorrow. This does come at a cost. Higher debt means that the government spends more on interest payments in the future, and has less room to borrow in bad times.


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