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The Economic Consequences of Mr Osborne

The Economic Consequences of Mr Osborne. Fiscal consolidation: Lessons from a century of UK macroeconomic statistics. Introduction. False dichotomy: deficit-cutters v postponers Rather: expenditure-cutters v advocates of stimulus Cutting deficit not in govt’s control Results show

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The Economic Consequences of Mr Osborne

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  1. The Economic Consequences of Mr Osborne Fiscal consolidation: Lessons from a century of UK macroeconomic statistics

  2. Introduction • False dichotomy: deficit-cutters v postponers • Rather: expenditure-cutters v advocates of stimulus • Cutting deficit not in govt’s control • Results show • Persistent expenditure cutting correlated with rise in debt / GDP • Expenditure increases, fall in debt / GDP

  3. Structure of talk • Main result (graph) • Choice of data omits transfers • Pre-WWII sample periods 1918-23 1931-33 • After WWII • Transfer payments

  4. ∆% expenditure

  5. Regression ∆% debt/GDP = 1.8 – 0.6 ∆% G. • R 2 = – 0.98

  6. Data / sources • Public expenditure: final consumption and fixed capital formation of CG & LG; excludes transfers • Feinstein, ONS • Public debt as % GDP • HMT website • Other: GDP, interest rates, unemployment, GDP deflator • As above and Homer and Sylla

  7. 1931-3: Austerity

  8. 1933-9: expansion

  9. After WWII Average over years: 1947-76 1976-2009 Government expenditure (% GDP) 22.7 22.5 Government expenditure (real growth) 2.3 1.4 Change in public debt (percentage points) – 6.8 + 0.6 GDP (real growth) 2.7 2.2 Unemployment 2.3 7.7 GDP deflator (growth) 6.1 5.4 Nominal interest rate 7.0 7.9 Real interest rate 0.9 2.5

  10. After World War II • Nominal expenditure grows every year • ‘real’ consolidation, mid-70s / IMF loan end 76 ______________________________ Nominal Real 1975 33.2 5.8 1976 15.8 1.7 1977 5.6 -1.2 1978 11.5 1.8 ______________________________

  11. General government debt, % GDP FIRST POST-WAR RISE, 1976

  12. Discussion • Spending • Transfers • Interest rates

  13. 1. Spending “Look after the unemployment, and the budget will look after itself” (Radio interview, 1933, CWXXI, p. 150) “For the proposition that supply creates its own demand, I shall substitute the proposition that expenditure creates its own income” (Draft chapter, 1933, CW XXIX, p. 80-1)

  14. 2. Wider measures of expenditure, % GDP 1947-76 1976-2009 GG final consumption and investment 22.7 22.5 Transfers 14.2 18.5 ____ ____ GGE 36.9 41.0

  15. 2. Transfers

  16. 2. Net Social benefits, % GDP

  17. 4. Interest rates / monetary policy • High debt not associated with high interest Correlation – 0.2 • From 1932 to 1952, policy aimed at setting low long-term rate of interest • Use of credit to bridge gap between expenditure and revenues • Bradburys • Treasury deposit receipts • ‘QEI’, incl. Ways and Means advances

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