Responsible Fiscal Policy

The OBR chief was right to correct the Prime Minister on his misleading interpretation of UK macro forecasts. That said, the impression has been left that “external” factors such as the global financial meltdown, high energy prices and the Eurozone crisis “explain” the bulk of the UK’s under-performance relative to forecast (which did recognise that, at the margin, fiscal austerity contributes to weaker short-term economic activity).

The problem is that we still need to address the more fundamental question as to why the UK should be so vulnerable to “external” shocks. Perhaps because the fiscal regime (in its broader sense that includes not just standard demand management but also structural reform, infrastructure, etc programmes) is failing to shoulder its counter-cyclical and supply-side responsibilities…

Britain’s austerity is indefensible, Martin Wolf, Financial Times, 12 Mar 2013
The IMF on the Austerity Trap, Paul Krugman, NY Times, 10 Mar 2013
A ticking off for the PM, BBC News, 9 Mar 2013
Causing recessions, Mainly Macro, 9 Mar 2013
Letter from Robert Chote to the Prime Minister, Office for Budget Responsibility, 8 Mar 2013

The Challenge of Debt Reduction during Fiscal Consolidation, IMF Working Paper No 13/67, 8 Mar 2013
Summary: Studies suggest that fiscal multipliers are currently high in many advanced economies. One important implication is that fiscal tightening could raise the debt ratio in the short term, as fiscal gains are partly wiped out by the decline in output. Although this effect is not long-lasting and debt eventually declines, it could be an issue if financial markets focus on the short-term behavior of the debt ratio, or if country authorities engage in repeated rounds of tightening in an effort to get the debt ratio to converge to the official target. We discuss whether these problems could be addressed by setting and monitoring debt targets in cyclically-adjusted terms.