I’ve written before that I find the current political debate ahead of the spending review somewhat confusing. The Government, and many of their supporters in the media, now appear to think that the way to gain “economic credibility” is to commit to a fiscal plan that has failed to achieve growth, deal with the deficit or even retain the UK’s AAA rating.
The argument can be summarised as: “our plan has failed to achieve any of its goals and opposition parties will only be seen as credible if they agree to stick with it.”
I’ve argued before that the real debate ahead of the coming CSR should not be whether political parties sign up to it but instead what the UK’s fiscal framework should look like.
A more appropriate framework for the UK would focus on reducing debt/GDP over a much longer timetable.
The more I think about it though, the more I think an even bigger point is being missed in the current debate around the politics of the CSR.
On most forecasts the economy is still likely to be depressed in 2015/16 and indeed 2016/17.
The crucial number to examine here is the output gap – and in particular the OBR’s own assessment of it.
Simply put, the output gap is a measure of how much spare capacity there is in the economy. If the output gap is negative then the economy is operating below capacity and there is a strong case for expanding demand to make good the difference While if the output gap is positive then the economy is operating above trend and may be overheating with consequences for inflation.
Back at in June 2010 the OBR forecast that by 2015 the output gap would be -0.9% of GDP, i.e. the economy would be operating a below potential but not by a huge amount.
The current OBR forecast is for an output gap to be -3.4% in 2015 and still at -2.9% in 2016. In other words, come April 2016 (the time when any new government can actually make spending decisions in a meaningful manner) the economy is still expected to have an output gap of almost three per cent . The OBR’s own forecasts imply that there is room for a fiscal expansion of almost three per cent of GDP in 2016/17.
Recent work from NIESR, funded by the TUC, found that in ‘crisis times’ (when output is depressed – i.e. a -2.9% output gap implies ‘crisis times’) then a capital spending intensive stimulus of 2% of GDP will boost growth, lower unemployment and lead to a lower debt/GDP ratio in the medium term.
Much of the current politics around the CSR feels “very 2010”.
The assumption in much of the political (if not the economic) coverage of the CSR seems that by 2015 macroeconomics will not really matter. The economy will broadly have recovered and the task of the Treasury will the essentially distributional job of managing cuts in public spending and tax rises to close the deficit, rather than actively managing demand and boosting growth. This is looking like an increasing optimistic view.
The economy in 2015 and 2016 is likely to remain, by any reasonable standard, depressed. The case for a new fiscal framework, which gives governments the room to borrow to boost growth in the short term, will remain strong.
To put this all really simply, we shouldn’t be so concerned about the ‘deficit deniers’, it’s the ‘depression deniers’ we need to worry about.
A longer version of this post is at Touchstone blog.
via Duncan Weldon Liberal Conspiracy http://liberalconspiracy.org/2013/05/31/the-uk-needs-to-worry-about-depression-deniers-not-deficit-deniers/