The economic cycle plays an important role in determining the level of government borrowing, especially in the short run. Essentially, higher economic growth leads to lower government borrowing, but a recession will increase government borrowing.
Over the past few years (2008-12) – the idea that an economic downturn increases government borrowing is probably one of my most repeated sentences on this blog.
- At the end of the 1980s boom, the UK ran a small budget surplus (negative net borrowing).
- The recession of 1991 caused a sharp swing in the budget deficit, with net borrowing rising to nearly 8% of GDP.
- The long period of economic expansion 1993-2001 saw a fall in net borrowing.
- The recession of 2008/09 saw record levels of government borrowing with net government borrowing increasing to over 10% of GDP
- The economic cycle isn’t the only factor affecting the level of government borrowing. For example, net borrowing increased 2002-2007 because the government increased government spending – despite the positive economic growth.
Recent Years since 1999
Why does government borrowing increase in a recession?