From Boom to Bust

Abstract

The New Labour government headed by Prime Minister Tony Blair inherits an improving economy and a surplus in public finances. At first, New Labour sticks to the tight fiscal policies of the previous government to show it is economically responsible. After 2001 however, it begins almost a decade of above-inflation increases in public spending, much of it funded by soaring tax revenues from buoyant financial services in the City of London. Chancellor Gordon Brown believes that the era of boom and bust is over, but he is proved dramatically wrong with the fiscal crash of 2007/8. The UK, the USA and other affected countries respond by injecting liquidity into the tottering financial system to prevent a repeat of the 1930s Depression, coupled with a Keynesian bout of public spending to offset the impact of the recession which follows. But this leads to soaring deficits which, in the case of the UK, hits 10 % of GDP.