The new government will inherit an unhealthy fiscal position, with public sector borrowing higher than would normally be expected at this stage of the economic cycle. Chart 1 shows the public sector financial deficit as a proportion of GDP when compared with an estimate of the cyclically adjusted deficit. This shows for each date an estimate of what the deficit would have been if the economy had been operating at full capacity, as in early 1973 and late 1988, and achieved a level of output higher than has been normal over the past twenty five years.(1) In cyclically adjusted terms, the budget was in surplus throughout the 1980s but went strongly into deficit around the time of the 1992 election. Since this also coincided with the recession, the actual budget deficit deteriorated sharply around this time, reaching a peak at the beginning of 1994. Since then there has been a decline in both the actual and the cyclically adjusted deficit.