Jonathan Hopkin and Mark Blyth in Foreign Affairs:
Despite Conservative spending cuts, the United Kingdom’s deficit was reduced by only half of what the party anticipated when it took office in 2010. The nation’s economy did not start to grow until late 2013, after a panicked treasury minister, George Osborne, relaxed austerity measures. The United Kingdom’s economic problems, the Conservatives maintained, were the result of Labour’s supposed profligacy in running budget deficits during the boom years of the early 2000s, leaving the economy exposed to the financial crisis. This, they argued, made draconian spending cuts inevitable.
However, as the crisis hit in 2007, the United Kingdom had the lowest debt to GDP ratio in the G7, lower than when Labour had taken power a decade earlier. And if Labour was supposedly running excessive deficits, the markets remained strangely unconcerned, with market rates on British bonds running close to pre-collapse lows. This left many wondering why the British budget exploded in 2008 and what it might say about coalition rule in the United Kingdom.
These questions, however, were strangely missing from discussion during the election. Cameron did not discuss why the United Kingdom’s outsized and overleveraged financial sector made the nation suffer disproportionately from the worst financial crisis since the 1930s. Financial deregulation and the unsustainable growth in private, not public, credit fatally exposed the United Kingdom’s banks to the United States’ subprime credit crisis. The collapse in credit growth in 2007–09 hurt the United Kingdom’s budget not because the Labour government was too deep in debt but because the national economy was more dependent on financial activity than elsewhere. By 2007, the British Exchequer was taking nearly 25 percent of total tax revenue out of the financial sector just prior to the crisis, which was a mere ten percent of the economy. With the financial crisis, these revenues plummeted, leaving the government short of cash and needing to borrow heavily.
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