The 2008 financial crisis, which developed into the deepest recession experienced in the UK since before the 1930s, formed the backdrop to the 2010 election and the formation of the coalition government. In 2010, the coalition stated that its first priority was to ‘reduce the deficit and restore economic growth’. The story of fiscal retrenchment will surely be one of the main things for which this government is remembered: cuts to public spending on a scale unprecedented in modern times have, in the main, been successfully delivered. However, the return to growth proved more elusive, making the path to deficit reduction much slower and rockier even than predicted in 2010.
Indeed, the coalition government has had to steer a course through economically uncharted waters. The slowdown has lasted longer, and had a more profound impact on household incomes and productivity, than any since at least the 1920s. Despite healthy economic growth since 2013, wages and national income per capita remain lower than they were pre-recession. Employment, on the other hand, has held up astonishingly well. Despite the upturn since 2013, the economy remains far from ‘recovered’, with labour productivity 16 per cent below the level implied by the pre-crisis trend.
Much lower-than-expected economic growth during 2010–12 means that deficit reduction has not gone to plan. The original expectation was that the ‘structural current budget deficit’ – that bit of the deficit that is not explained by spending on investment and that which will not disappear automatically as the economy returns to trend levels of output – would have been dealt with in time for the 2015 general election. That has not happened. That itself has profound political consequences. The coalition cannot go to the electorate saying ‘job done’ on the deficit. Rather, they have signed up to another very tough spending settlement for 2015–16 and the coalition government's plans imply further cuts to spending in 2016–17 and 2017–18.