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 money we can't raise from taxation needs to be borrowed, and as taxpayers, we're the guarantee on the loan. Every year, this budget deficit is added to our national debt.
In 1997 Labour inherited a budget that was actually in balance. After a painful and turbulent decade under the Tories, the public finances had finally been brought under control. But after four years in office Gordon Brown took out the country's credit card and let rip. By the end of 2009-10 our annual deficit had ballooned to £170.8 billion.
This graph shows how the UK's budget deficit has fluctuated as a percentage of the country's economic output (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 borrowed a monumental £170.8 billion last year. If all goes well, we're set to borrow another £167.9 billion this year.
This kind of deficit is far greater than during the recessions of the 80s and early 90s and even higher 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.