Britain's budget deficit

As a country, we've grown accustomed to living beyond our means. The Government's tax revenues are rarely enough to fulfill its generous spending promises, so every year Britain runs a large budget deficit. The rest of the money needs to be borrowed, and as taxpayers, we're the guarantee on the loan. The Government borrows money by promising that we will pay it back through future taxation.

In 1997 Labour inherited a budget that was actually in balance. After a turbulent decade, the public finances had been brought under control and our income matched our outgoings. But after four years in office Gordon Brown took out the country's credit card and let rip. By the end of the last financial year our annual deficit had ballooned to £90 billion.

This graph shows how the UK's budget deficit has fluctuated as a percentage of the country's economic output (GDP):

UK budget deficit by GDP

As the graph shows, the budget was barely in surplus for more than a few years. We've been maxing out a new credit card almost every year, even in the good times. If a company were run like this, it would have long been declared bankrupt. So how much longer can we defy financial gravity? Well, we're about to find out.

Public finances out of control

At the very time tax revenues are declining and a debt crisis is ravaging the global economy, our politicians have chosen to go on an unprecedented spending splurge. To fund it, the Government is preparing to borrow a monumental £241.6 billion this year. Many think even that figure is optimistic.

The European Commission forecasts that UK public spending will surge by 8.4% of GDP between 2007 and 2010. That's more than Germany, more than the USA and more than double the increase in France. It's more than during the recessions of the 80s and early 90s and even more than when Britain went cap in hand to the IMF in 1976.

This isn't money saved for a rainy day. Because we continued to rack up debt in the good years, this latest spending spree is fueled by one big borrowing binge.

Bullet Next: "Who do we borrow all this money from?"