Archive for the ‘Fiscal stimulus’ Category
Friday, June 25th, 2010
I have just recovered from the Budget this week, as it was even worse than I had anticipated. I keep writing in my blogs that extreme austerity packages are going to damage the economy but George Osborne is just not listening. What’s the point of me writing all this if he is not taking a blind bit of notice.
I saw quoted today that Albert Edwards a strategist at Societe Generale, said: “The clowns pulling the levers of fiscal and monetary policy will take us back into recession. He thinks that both economic and market recovery will “collapse like a pack of cards” as governments remove their financial stimuli.
I’m already putting money under the mattress and trying to sell our cat on ebay, but the economy is going to get worse. I did, however, note that David Cameron on his way to the G20 conference in Canada, has said that the government expect growth to continue as a result of a loose monetary policy.
It is true that the Governor of the Bank of England has applauded the austerity package, but will an overtight fiscal policy be offset sufficiently by a loose monetary policy. Plus, the Bank does not have much to play with. It cannot reduce interest rates below half a per cent, and the only alternative would be more quantitative easing, which isn’t likely to happen.
There are problems with sovereign debt and the question marks over which countries might default on their loans. Greece is a prime example of this with Greek bond prices falling this week as buyers sought higher yields. However, the UK is not Greece and we have not seen any dilution in the demand for UK debt.
In conclusion, it is true that the markets welcomed the Budget. The pound appreciated against the euro which is supposed to be a good sign, but will make our exports more expensive. Anyway, it won’t matter, because none of the countries that are introducing fiscal austerity programmes will be able to afford our exports anyway. I’m off to the pub.
Tags: austerity packages, Budget, fiscal policy, monetary policy, Public Finances, sterling
Posted in Balance of Trade, Exchange Rates, Fiscal stimulus, Interest rates, Public Finances, government borrowing, government spending | No Comments »
Monday, June 7th, 2010
This was David Cameron’s take on the UK’s economic situation over the weekend. He said that painful cuts would have to be made which would affect “our whole way of life”.
He also added that: “Because the legacy we have been left is so bad, the measures to deal with it will be unavoidably tough …”
His argument was that unless the deficit was tackled immediately there would be a drop in confidence in the UK economy which would result in interest rates going up, which in turn would increase borrowing costs.
I am getting increasingly worried about the scale of the hysteria concerning government borrowing and the softening up of the UK public to expect severe and prolonged cuts. With Germany announcing its own austerity programme this weekend and international organisations such as the OECD and IMF stipulating the need for cutbacks, we could well see a downward spiral in spending, production and growth. I could see the UK slipping back into recession over the next twelve months.
It is important to point out that there is no general agreement on the need for such swingeing cuts at the moment. Yes, the public finances need to be put on a firmer footing. Yes, we need to trim waste and use government revenue more effectively. But, do we need to cut so quickly and so deeply?
Paul Krugman wrote an article in The New York Times today headed “Madmen in Authority”, in which he slated the demands for fiscal austerity. He maintained that the key thing to realise is that eliminating stimulus spending, while it would inflict severe economic harm, would do almost nothing to reduce future debt problems. Cutting the stimulus would result in lower revenue.
His argument is that the main reason that demands are being made for immediate fiscal austerity is to “reassure the markets” which is the reason that David Cameron has given. Krugman says that “….the markets supposedly won’t believe in the willingness of governments to engage in long-run fiscal reform unless they inflict pointless pain right now.” However, he says that “…there is actually no sign that markets are demanding any such thing” with countries such as the US and UK being able to borrow at very low interest rates.
He concludes by saying: “So wise policy, as defined by the G20 and like-minded others, consists of destroying economic recovery in order to satisfy hypothetical irrational demands from the markets – demands that economies suffer pointless pain to show their determination, demands that markets aren’t actually making, but which serious people, in their wisdom, believe that the markets will make one of these days.”
Tags: Fiscal stimulus, government borrowing, government spending, Interest rates
Posted in Fiscal stimulus, Gross National Income, Interest rates, economic growth, government borrowing, government spending | No Comments »
Wednesday, May 26th, 2010
The latest OECD Economic Outlook says that GDP is projected to rise by 2.7% this year and 2.8% in 2011, across the OECD countries. Previous forecasts last November expected growth this year to by only 1.9% and 2.5% next year.
Whilst economic activity is picking up faster than expected, the OECD warned that sovereign debt markets and overheating in emerging-market economies are presenting increasing risks to recovery.
The latest projections are shown below.
 GDP projections (% change from previous year) Source: OECD The US is expected to see a rise in GDP of 3.2% this year and a further 3.2% in 2011, whilst the Euro areas is only forecast to increase by 1.2% this year and 1.8% next. Japan is expected to expand by 3.0% in 2010 and by 2.0% in 2011.
“This is a critical time for the world economy,” said OECD Secretary-General Angel Gurria. He went on to say that: “Many OECD countries need to reconcile support to a still fragile recovery with the need to move to a more sustainable fiscal path.”
The OECD says that given the strengthening recovery and the huge overhanging debt burden, the emergency fiscal measures which governments used to tackle the crisis need to be removed by 2011 at the latest. However, it does add that the pace of such action must be appropriate to particular conditions and the state of public finances in each country.
It also says that as budgets are being tightened, growth needs to be supported by linking macroeconomic, financial and structural policies. Spending cuts or tax rises should focus on areas that are least harmful to growth, adding that the reform of product and labour markets to enhance competitiveness must also be part of the strategy.
Tags: economic growth, fiscal policies, GDP, OECD
Posted in Fiscal stimulus, OECD, economic growth, government borrowing, government spending, taxation | No Comments »
Friday, May 7th, 2010
Well to be strictly accurate it will be from the Queen’s Head. I’m meeting Skipper Harrison and some of the lads down there for a celebratory drink. We’re used to late night sittings, so this running the country stuff should be a bit of a doddle.
The first thing we will have to do is choose a cabinet. I know Skipper’s got his eye on a teak one which holds lots of bottles, and where the little light comes on when you open the doors.
We’re planning to make the tough decisions no one else wants to tackle. The first thing that we’ve decided to do is abolish the Treasury. Those guys couldn’t work out which way the wind was blowing during a hurricane. So, time for a change. We are going to replace it with the Department of Professional Economists, or DOPE for short.
If you are interested in the position of Chief Dope you can apply using my bank account details at the end of this message.
We obviously need to get the economy booming again. The way we are going to tackle this is to ensure that the rate of inflation is always higher than the rate of return on savings, ensuring that the real value of savings will continually fall. This will result in individual savers and pension funds liquidating their holdings and pouring billions of pounds into consumption. Of course, it makes even more sense to buy now before prices go up even further. This will raise GDP to well above the EU average and result in a higher tax take.
So, problem solved. We can then concentrate on getting new roofs on our duck houses. This could be used as work experience for the unemployed.
Our policies will then result in higher consumption, increased GDP, soaring government revenues and lower unemployment. I think we deserve that other drink now. It’s easy when you are a real economist.
Unfortunately, in the make-believe world of politics things will probably be very different. Everyone is talking about a hung parliament and a coalition government. My guess is that the Liberal Democrats and Labour will get together to form a new party called Libor to run the country. They will rely totally on borrowing from investment banks with Golden Sacks and Lemming Brothers being the main contributors. This way to the edge of the cliff, everybody.
Tags: GDP, government revenues, Inflation, Interest rates, investment banks, savings, tax take
Posted in Fiscal stimulus, Gross National Income, Inflation, Interest rates, economic growth, government borrowing, savings, unemployment | No Comments »
Thursday, December 10th, 2009
A reduction in bingo duty from 25% to 20% was the centrepiece of yesterday’s Pre Election Manifesto – sorry, Pre Budget Report – presented by chancellor, Alistair Darling.
Whilst it’s true that the chancellor had all the room to manoeuvre of a man holding a wake in a telephone box, he actually played safe by doing ….well…..doing virtually nothing. His rationale went something like this. The current government has done really well in holding everything together during the worse recession since the 1930s. If it hadn’t been for the rescue of the banks, the huge fiscal stimulus and the quantitative easing, the UK would now be twinned with Iceland.
He announced a slight increase in his estimate of UK borrowing costs this year, which will now reach £178bn compared to the earlier Budget forecast of £175bn. However, next year borrowing will be £176bn. You see the difference? No, okay then let me explain. In actual fact the government is not going to take any tough decisions on lending cuts for another year. The reason for this is that cutting back on expenditure now will undermine the recovery and perhaps lead to a “double dip” recession.
This has absolutely nothing to do with the fact that there is a general election due early next year and the fact that government ministers do not wish to add to the rising unemployment levels by losing their jobs. Well, it makes sense doesn’t it? This means that all the tough decisions on spending cuts will have to be deferred until after the election. And the chancellor did not give us even the tiniest clue as to how these reductions would be achieved. However, borrowing will be cut to £82bn by 2014-15.
There is to be a cap of one per cent on public sector pay for two years from 2011 (not next year of course) and there will be an increase in national insurance contributions of 0.5% from 2011 which is on top of the 0.5% which was announced in April’s Budget. This did not go down well with struggling small businesses although the proposed one per cent increase in corporation tax has been put off for twelve months.
The government has also identified a few billion pounds in efficiency savings but it seems that they will actually be spending these.
In fact, I am going to make my own efficiency savings, so if you want to see the minutiae of the Pre Budget Report with all the forecasts for debt, borrowing and expenditure you can see them on the Treasury’s microsite by clicking here.
Tags: corporation tax, fiscal policy, government spending, national insurance, pre budget report, Public Finances, spending cuts
Posted in Fiscal stimulus, Public Finances, government borrowing, government spending | No Comments »
Monday, October 5th, 2009
“Our research shows no evidence of a Keynesian ‘multiplier’ effect.” So, says Harvard professor Robert J.Barrow, who together with Charles J.Redlick, wrote a piece in The Wall Street Journal last Thursday. According to Barrow and Redlick, government stimulus packages are predicated on the view that expenditure multipliers are greater than one. To estimate these potential multiplier values they examined US defence spending during wartime periods.
They conclude by saying: “The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP.” To see their article click here.
Nobel prizewinner, Paul Krugman, responded in The New York Times, by arguing that what happened during wartime tells us very little about what would happen under current conditions. He says: “…during World War II there, um, was a war on: consumption goods were rationed, construction required special permits, and so on. The government was, in other words, deliberately suppressing private spending, through direct controls. So WWII is not a useful data point for determining what the multiplier is under other conditions.” To see his article click here.
An interesting article on this area has just been published by Ilzetski et al which offers a wide range of multipliers depending on a country’s situation. According to the authors: “Our findings lead to the usual “it depends” answer to the size of the fiscal multiplier question. As those familiar with macroeconomic theory likely anticipated, the size of the fiscal multipliers critically depends on key characteristics of the economy (closed versus open, predetermined versus flexible exchange rate regimes, high versus low debt) or on the type of aggregate being considered (government consumption versus government investment). Policymakers would therefore be well-served in taking into account a given country’s characteristics in evaluating the benefits of any fiscal stimulus package.”
Tags: Fiscal stimulus, government spending, multiplier effects
Posted in Fiscal stimulus, Multiplier Effect, government spending | No Comments »
Friday, July 17th, 2009
The UN Conference on Trade and Development (Unctad) has just published its “Least Developed Countries Report 2009”, which looks at the world’s 49 poorest countries.
The report says the Least Developed Countries (LDCs) need to focus macroeconomic policy on building up both the productive capacity of their economies and infrastructure. Also, they need to ensure that their fledgling banking sectors lend towards productive activities rather than government portfolios and real estate.
Given the current crisis, LDCs will find it difficult to take corrective action of this nature and will still be dependent on Official development assistance (ODA). Although the report notes that this has often been wrongly directed in the past and has been used as a substitute for fiscal revenues. The report urges that ODA be maintained or even raised during the current crisis, with even more emphasis on debt relief, but that the aid should increasingly be used to bolster economic infrastructure whilst making it possible to raise more revenue through the domestic economy.
Unctad takes a swipe at the World Bank and IMF, who it maintains have, for the last three decades, encouraged LDCs to concentrate on using monetary policy to contain inflation, whilst ensuring fiscal policy keeps budget deficits at a moderate level. At the same time little emphasis has been placed on public investment as a vehicle to promote economic development.
The report argues that LDCs should now refocus their economic objectives to develop their productive capacities to produce more varied and sophisticated products. This will mean adopting expansionary fiscal policies and accommodating monetary policies, together with the maintenance of exchange rates and capital flows. Greater investment into agriculture and infrastructure as well as health and education will help draw in private investment and raise labour productivity, as well as combating poverty, generating employment, reducing inequality and diversifying economic structure.
How can states raise public investment to the necessary levels? They need to improve tax revenues which in 2000-2006 only rose marginally in LDCs to 12% of GDP, despite strong economic growth, which compares to tax takes of 30-60% in richer countries. The report calls for a halt on further trade liberalisation, an increase in tax on luxury goods, an improvement in the effectiveness of taxes on high incomes and corporations and a strengthening of property taxes.
Too much attention has been placed by LDCs on using monetary policy to reduce inflation. The report concedes that inflation has fallen, but that restrictive monetary policy has delivered high real interest rates on average, which has made much investment unviable.
In conclusion, the report suggests that LDCs manage their capital accounts to deal effectively with the two major problems of capital flight and short-term capital volatility. It also calls for managed exchange rate systems – such as a managed float or loose adjustable peg system – which would allow LDCs to maintain the competitiveness of their exports.
Tags: aid, exchange rate policy, IMF, Least developed countries, macroeconomic policy, monetary policy, Unctad, World Bank
Posted in Development, Ezine, Fiscal stimulus, International Monetary Fund, Low-income countries, World Bank, aid | No Comments »
Tuesday, June 23rd, 2009
Traditional Keynesian theory suggests that a change in government expenditure on real GDP has an effect greater than one-for-one. In other words as a government pumps money into the economy this will put unemployed resources to work which will have a one-for-one effect initially. However, as households receive additional income they will spend some of this and thus there will be a “second round effect” which we call the “multiplier effect”. The outcome is that the effect of an increase in government spending is greater than one.
 What are the multiplier effects of tax reductions versus an increase in government spending?
On the other hand, basic Keynesian theory also predicts that the multiplier effect of a reduction in taxes will have a lower effect on real GDP than an increase in spending. This is because part of a tax cut will be saved and will initially result in a less than one-to-one effect.
At the end of last week the Federal Reserve Bank of San Francisco published an article by Sylvain Leduc, Research Advisor, entitled “Fighting downturns with fiscal policy.” This article summarises recent research into multiplier effects of fiscal policy in the US economy and comes up with remarkable results that suggest basic Keynesian theory has the multiplier effects of spending versus taxes the wrong way round.
To read the full article click here.
Tags: automatic stabilisers, fiscal policy, government spending, multiplier effects, tax cuts, US
Posted in Fiscal stimulus, Multiplier Effect, Public Finances, US economy, government spending | No Comments »
Wednesday, June 3rd, 2009
Yesterday, the German chancellor, Angela Merkel, hit out at the leading central banks and their policies. Principally, she was gunning for the Bank of England, the US Federal Reserve and the European Central Bank (ECB). She was particularly upset about the policies of “quantitative easing” which is basically printing money to purchase existing government and corporate bonds with a view to increasing liquidity into the system.
She said: “What other central banks have been doing must be reversed. I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe. Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds. We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years’ time.”
Why did Ms Merkel break with convention and criticise these central banks? Well, we have to remember that Germany is still plagued with memories from the years between the 1st and 2nd world wars when the country suffered from hyperinflation. Workers were being paid twice a day in cash at one stage, because the value of money was dropping at such an excessive rate.
Also, she may well have fears that current world policies are about to fuel a surge of inflation in the coming years. As Wolfgang Munchau argues today in the Financial Times “…such inflation would put immense pressure on Europe. The ECB might face a choice between accepting a massive appreciation of the euro, which would endanger economic recovery, or accept a politically unpopular rise in inflation.”
So, is she only looking out for Germany’s future interests? In fact, in the present crisis, the German government has been the most conservative in its resort to fiscal and other stimuli, and Germany has seen the biggest decline in GDP of all the major EU countries.
On the other hand, she might have a point about the possible future effects of quantitative easing. Does anyone really know what the impact will be? The problem at the moment is that no one, including the Bank of England, really knows whether it is working or not.
The M4 broad money supply figures for April (excluding other financial corporations) only rose by 0.1% on a month-on-month basis. This was the measure which the Bank of England was expecting to rise in order to pump more liquidity into the system. This could mean that even more money needs to be put into the economy before the necessary effect materialises and that it might have been even worse if the Bank of England, and perhaps other central banks, had not taken the measures they have.
There is also the argument that the £45bn which the Bank of England has used to buy bonds has mainly gone to overseas holders and is currently boosting someone else’s money supply.
Or, there might be an indeterminate time-lag until the effect works its way through and in a year or two’s time we might see strong, inflationary pressures working their way through. In which case, Angela Merkel might very well be right.
Tags: central banks, Germany, Inflation, monetary policy, quantitative easing
Posted in Bank of England, Fiscal stimulus, Inflation, Money Supply, recession | 1 Comment »
Monday, April 20th, 2009
So says a survey published this morning by the Ernst & Young Item Club. In its Spring Forecast it expects GDP to fall by 3.5% this year but by only 0.1% next year. It claims that the economy is no longer in “free fall” and that a recovery next spring is the most likely scenario.
Professor Peter Spencer, Chief Economic Adviser to the Ernst & Young ITEM Club argued that: “So far at least the signs are positive that the MPC’s (Monetary Policy Committee) aggressive policies are working. The latest credit conditions survey by the Bank of England Showed a net improvement in corporate credit availability and ITEM believes that a combination of low interest rates, QE (quantitative easing) and agreements on lending between government and the banks will lead to more positive signs for both corporates and consumers. The credit crunch may finally be easing and with it will come the beginning of the end of the recession.”
 The end may be in sight
However, while that is the good news there is still a lot of bad news out there waiting to unfold. According to Spencer: “…we face another 12-18 months of serious grief. Around nine hundred thousand jobs will be lost this year and half a million next. Consumption will fall by nearly 4% over this period as people worry increasingly about job security.”
ITEM also predicts that both the housing market and the retail sector will struggle over the next 12 months. But, it is also noted that although world trade has “fallen off a cliff” and will decline by 9% this year, the fact that the UK has not done very well in the past in exporting goods to China will mean we will not be as badly off as Germany and Japan. In fact, given the weakness in sterling, the UK will be in pole position next year when world trade starts to recover.
Spencer also argues that there could be a risk of a W-shaped recovery. This would show the rapid downturn followed by an upturn of sorts, which could be rapidly choked off if the government puts the brakes on too early after the economy starts to pick up, and forces us into a further temporary downturn. However, he also notes that the outcome could be better than predicted. “The corporate sector led us into this recession and is likely to lead us out. If companies anticipate the upturn as they did the downturn this could be faster than this forecast suggests.”
Tags: economic forecasts, GDP, ITEM Club, unemployment, World Trade
Posted in Bank of England, Employment, Fiscal stimulus, Monetary Policy Committee, World Trade, recession, sterling, unemployment | No Comments »
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