Comments on: Osborne’s Mandate: There is no flexibility

By: Gareth

Gareth — Tue, 04 Oct 2011 10:17:09 +0000

The OBR seem to use a multiplier of exactly 1 for capital spending (in their documents from 2010 anyway), even when taking into account the expected monetary policy response. On that basis, the government could deficit-finance more capital spending, and raise the level of NGDP – hopefully leading to higher real growth – yet keep debt/NGDP the same.

By: duncanseconomicblog

duncanseconomicblog — Tue, 04 Oct 2011 08:50:56 +0000

Gareth,

Sorry for the late reply.

I, of course, accept this argument. The OBR, the guardian of the forecast, appears not to. And for Osborne – that’s what matters.

By: Keith

Keith — Sun, 02 Oct 2011 15:53:06 +0000

I am amused by the use of the word “mandate”. No one coffered a mandate on the present Cabinet to do anything. They gave no intimation of these policies at the election; the Liberals opposed most of them at the time. The policy of the Cabinet has no connection with promoting economic prosperity but merely allowing more tax cuts and profiteering by the wealthy. All based on voodoo economic myths. This is an Anti democratic disgrace. Productivity growth will be lower not higher. As has proved to be the case when ever these policies have been applied.

By: Gareth

Gareth — Thu, 29 Sep 2011 13:21:07 +0000

Hmm, my greater-than sign got filtered. “If investment spending has a fiscal multiplier greater than 1″, that should read.

By: Gareth

Gareth — Thu, 29 Sep 2011 13:19:41 +0000

“Osborne has no room to for a discretionary stimulus”

If investment spending has a fiscal multiplier 1, extra deficit spending now would increase GDP faster than it increase debt, so the target of falling “debt/GDP” would be *helped* not hindered by extra spending.

This is the whole point of Keynesian spending, right? So if you think the fiscal multiplier is < 1, why advocate for fiscal stimulus at all?

By: gastro george

gastro george — Sat, 24 Sep 2011 12:31:26 +0000

To paraphrase Goering, “when I see somebody reaching for the structural deficit, I reach for my gun”.

By: JakeS

JakeS — Sat, 24 Sep 2011 08:29:54 +0000

The amount of investment needed is much higher and it cannot all come from a government stimulus anyway.

This is a statement of political preference, not of operational constraints: In extremis, a sovereign state can command the sum total of productive capacity within its borders - there is no output gap so large that the sovereign is incapable of closing it, given the will to deploy sufficient seigniorage to do so.

But with growth almost certain to be weaker over the coming years than official forecasts, the bulk of the overall fiscal deficit almost certainly “structural” rather than “cyclical”,

No, weak (real) growth should tend to reduce, not increase, the full-employment deficit. The full-employment deficit is based on the needs of the private sector to amortise investments (which is, ceteris paribus, increased by real growth and reduced by inflation) and to maintain the share of sovereign securities in the private sector's portfolio. So while inflation has ambiguous effects on the necessary deficit, real growth will unambiguously increase it, unless private savings desires and portfolio preferences change simultaneously (and fairly radically). Of course, the "structural deficit" that the OBR computes is not the full-employment deficit. But that is a problem with the OBR, not with the above analysis. - Jake

By: Slinky

Slinky — Fri, 23 Sep 2011 12:19:55 +0000

Good post, and I agree on the likelihood of missing the debt target, but am I missing something? Yes, by targeting the current structural deficit there’s some implied scope for the govt to allow “automatic stabilisers” to work. But with growth almost certain to be weaker over the coming years than official forecasts, the bulk of the overall fiscal deficit almost certainly “structural” rather than “cyclical”, and every chance that the size of this “permanent” deficit will be scaled even higher when the OBR has to revise down its estimate of the output gap in future forecasts, doesn’t the fact that Osborne is targeting the structural deficit mean that his hands are tied even more, not less? That is, he can’t blame weak growth for missing his balanced structural budget target. Weak growth will just make it harder to bring about the planned improvement in the structural deficit. Given the large size of the structural deficit, and the prospect of it being revised even higher, isn’t it more likely he’ll have to introduce greater austerity, not less, in order to balance this part of the fiscal budget?

Obviously the solution is for the OBR to just say instead there’s a massive output gap, and that the deficit is almost all cyclical…!!

By: Agog

Agog — Fri, 23 Sep 2011 11:54:25 +0000

With you.

By: duncanseconomicblog

duncanseconomicblog — Fri, 23 Sep 2011 11:34:41 +0000

Yes – unfortunate that that’s what people ten to assume.

I mean raising the wage share of GDP, rebalancing from speculation to real investment, reforming the UK property market, etc, etc…