Thursday, January 6, 2011

A UK Fiscal Policy Primer

A quick primer in UK fiscal issues......

Issue one: We have a very big fiscal deficit

Everyone knows it, but it never hurts to remind ourselves just how big it is. It is massive, huge, gigantic, beyond large, humungus, excessive, and gargantuan.

It is running at around 10 percent of GDP.

Issue two: The deficit is big mostly because of government expenditure

Tax collections have fallen. The bulk of revenue falls occurred in 2008, when VAT was foolishly cut. That has now been reversed. However, public expenditure has continued to grow in terms of GDP.

Issue Three: The Coalition government want to cut the deficit by reducing expenditure

The coalition wants to cut the deficit by around 10 percentage points of GDP by 2016. Three quarters of the adjustment will fall on expenditures.

What does Alice think?

She thinks the adjustment lacks ambition and would like to see a more rapid decline in the fiscal deficit.

Her maxim is "if in doubt, cut it out".


  1. Does Alice understand debt and deleveraging?

    If the private sector is paying down debt AND the government is paying down debt at the same time, where are we?

    In a deep recession, that's where.

    In a bank credit money system, someone has to borrow to maintain the money supply and aggregate demand in the economy.

    The Tories are praying for the private sector to start re-leveraging. Or for an export boom to improve Britain's balance of payments. Neither is going to happen. Cuts = recession.

    There is nothing to fear in increased government borrowing in a time of recession. Bigger deficits are what is keeping the UK going right now.

  2. Barry,

    Thank you for your comment. Respectfully, I had a slightly different view.

    First of all, the recession is inevitable. We need to be grown up and honest about that fact.

    Private sector balance sheets are overextended and households must pay down debt. This will reduce consumption and output will fall. There is no avoiding a fact.

    Likewise, the government has accumulated too much debt. It too, needs to consolidate.

    The choice comes down to some pain today, and a catastrophic disorderly correction in the future.

    I choose adjustment today. Delay will only make things worse.