The UK’s budget problems date back to the 2008 financial crisis

Over the past few weeks, economic news from the U.K. has heavily focused on the state of British national finances and how they might impact both the British public and the prospects for economic growth.

A number of accusations and denials have flown between the rival Labour and Conservative parties over the state of the country’s budget deficit, particularly between current and former finance ministers Rachel Reeves and Jeremy Hunt.

Regardless of how the U.K. fiscal situation stands now, it is clear that the current shortfalls are both years in the making and run the risk of having consequences that could last for years to come. The ultimate dilemma facing Labour now is that the country cannot produce enough revenue to close systemic shortfalls without sustained economic growth, but it also cannot create economic growth without real investment, both from the public and private sectors.

In many ways, the current fiscal situation dates back to the financial crisis of 2008 and the fact that the country’s economy was unable to snap back readily to close the budget shortfalls that occurred then.

When U.K. revenues failed to recover, the Conservative government of the time chose to implement austerity measures, temporarily cutting back on public investment in everything ranging from infrastructure to public health and social services.

The problem lies in the fact that these measures, sold as a short-term solution, still remain and that the cost of the continued ageing of the U.K. population, the burden of Brexit on everything ranging from small business exporters to the financial sector, and continued sluggish economic growth mean that any options available for the current Labour government are and remain limited.

One thing that the U.K. government clearly cannot do, unlike countries such as the United States, China, or Japan, is run large-scale deficits, either by increasing spending or by further cutting taxes. Borrowing in the financial year to August stood at £64.1 billion ($85 billion), with the country’s debt hitting 100% of GDP.

For decades, Britain was considered one of the world’s reserve currencies, but with all of the benefits it granted, recent events have reinforced this to no longer be the case. The reaction of the bond markets to then Prime Minister Liz Truss’ proposed budget of 2022 showed that the private sector would not support any significant deficit spending, particularly from tax cuts.

At the same time, both Labour and Conservative leaders are keenly aware of the limited financial resources currently available to fund public programs. One well-known argument put forward in favor of Brexit was the fact that money being sent to the European Union could be used to restore funding to the beleaguered…