Did Labour run a structural deficit before the recession?

31st Jan 2011

"I don't think we had a structural deficit at all in that period [before the recession]"

Ed Balls, BBC Andrew Marr Show, 30 January 2011

Ed Balls' appointment as Shadow Chancellor earlier this month has inevitably piqued interest in his record at the Treasury, where he worked under Gordon Brown during Tony Blair's premiership.

However the new Shadow Chancellor's claim that the previous Government had not run a structural deficit before the recession hit seemed a particularly striking and brave defence of its economic record.

Especially so given that a glance at his own Government's Pre-Budget Report of 2007 recorded a cyclically-adjusted deficit — the term for the structural deficit favoured by economists — of 3.1 per cent for the financial year prior to the recession.

Similarly the Organisation for Economic Co-operation and Development (OECD) has published figures which suggest that in the first decade under Labour the cyclically-adjusted deficit grew by around 1 per cent.

However to substantiate his claim, Mr Balls argued that "we had a deficit, but we were covering that with investment."

The reference point for the Shadow Chancellor here is Gordon Brown's so-called "Golden Rule", which argued that a Government should only borrow to invest, rather than to cover the financing of its day-to-day operations.

There is some evidence that increased capital expenditure does indeed partly account for the deficit maintained by Labour between 2002 and 2008. The Institute for Fiscal Studies noted in its 2008 report 'The UK Public Finances: Ready for Recession?' that: "Labour has used more of its

borrowing to finance capital investment rather than current spending than the Conservatives did."

Yet whilst this may explain the reasons for a structural deficit, it cannot hide the fact that one did exist. The concept of a structural deficit is somewhat amorphous, relying as it does upon estimations of the peak potential of a given economy (for more details, see our report 'The Big Question'). What is clear however is that by the Treasury's own judgement, and that of international bodies, there was a structural deficit between 2002 and 2008.