Debt, deficits and the fiscal framework

It has been widely reported that the government is considering abandoning the second half of its fiscal mandate - that debt should be falling as a percentage of GDP in 2015-16.  My view is that the short term economic impacts of this are limited.  It's not really news; NIESR has been saying for well over a year that this target was unlikely to be met.  What deficit reduction we've seen so far - largely achieved through cutting investment - hasn't exactly gone according to plan.  Nor should we worry about the markets - they certainly haven't reacted yet and I doubt they will.  As for the ratings agencies, any policymaker who pays them the slightest attention shouldn't be allowed near economic decision-making. 

Chris Giles and the "NIESR chart"

Today we published our latest monthly GDP estimates, and alongside that our chart showing the path of recession and recovery in this and previous downturns.  Chris Giles has responded with a critique, pointing out that if you look at employment rather than output the picture is very different.  He's quite right; but, as he says, many others (including me) have made this point before.   Having made this simple point, though, he then becomes somewhat hyperbolic, arguing that:

"NIESR is doing the country a huge disservice in continuing to publish the NIESR chart alone"

Things could and should be better

[This note was prepared for the Policy Network economy conference, "The quest for growth".] 

The UK economy has many underlying strengths and things could and should be better. If only policymakers would act

There is plenty of spare capacity in the UK economy. The Office for Budget Responsibility’s (OBR) estimate of the "output gap" (a little over 2 percent) is unrealistically low; both we at NIESR and the International Monetary Fund (IMF) think it is higher (around 4 percent). And we may well be too pessimistic.

Indeed, even with an improving labour market, unemployment is still nearly a million higher than official estimates of the "structural" rate (the NAIRU), while on the OBR's forecasts (which are likely to be too optimistic on growth in the short term, and too pessimistic on supply potential) unemployment will remain well over the NAIRU, and output well below potential, for years to come.

Cut red tape to boost growth? Start with immigration

With the economy persistently weak, there is a growing consensus among economists that premature austerity has done considerable unnecessary damage, and that there is a strong case for slowing fiscal consolidation -  at least to restore some of the unnecessary and damaging cuts to public investment (which have been the source of most of the deficit reduction so far). However,  others have instead argued that the problem is not on the demand side, but on the supply side, and that what is needed is a radical programme of deregulation - "cutting red tape" - especially in the labour market.  

The impact of alternative paths of fiscal consolidation on output and employment

NIESR has just published research estimating the economic impact of immediate versus delayed fiscal  consolidation in the UK.  The research was undertaken by Dawn Holland (NIESR), John Van Reenen, Professor of Economics at the London School of Economics and Director of the Centre for Economic Performance, and Nitika Bagaria, a Phd student also at LSE and CEP.  John and I have written an article for the FT(£). 

NIESR's UK forecast, August 2012

NIESR's quarterly forecast for the UK economy is published today. Highlights: 

• The economy will contract by 0.5 per cent this year, but grow by 1.3 per cent in 2013.

• Consumer price inflation will fall below the 2 per cent target by the end of 2012.

• Unemployment will peak at 8.6 per cent in 2013.

• We expect the cyclically adjusted current budget to be in surplus in 2016–17.

NIESR's world economy forecast, August 2012

NIESR's quarterly forecast for the world economy is published today. Highlights:

• Concurrent slowdown in every major economic region: world growth to slow to 3.3 per cent this year and 3.7 per cent next year.
• All major countries opt for the same policies of near zero interest rates and fiscal tightening.
• European countries face remarkably divergent growth paths next year: Germany above trend growth and Southern Europe in deep recession. Tensions will heighten further.
• World demand below potential output growth means rising unemployment – in some countries even higher than seen in the Great Depression.