Responses to Osborne’s Choice Related publications
Osborne’s Choice: Combining fiscal credibility and growth
It is clear that the fiscal impact of different forms of expenditure vary greatly. As Ian points out, even the OBR – who tend to stick as close as they can to the consensus (which is almost always, as Robert Chote often tells us, wrong about the medium to long term) – believe that the multiplier for infrastructure is much higher than that for certain tax changes. So this is an important new angle to the debate that’s largely been overlooked until now.
There are good theoretical reasons why different ways of achieving a fiscal boost might have different effects. The impact of income tax cuts, unless directed at the poor (a hard task since most of the poor do not pay tax), get diluted as people save the sudden windfall and don’t spend it all, while corporation tax cuts may only improve the profits of banks and not induce more investment from the bulk of the industrial sector. Other forms of stimulus also leak abroad as some of the newly created demand is met from imports.
Of course other factors also come into play. How far can the stimulus be implemented and how quickly will it work? The need for fast action, easily delivered, lay behind some of what New Labour did in response to the recession when in government. A sharp VAT tax cut (and one that people knew would be reversed as we pre-announced it), was something that could be done fast and could and did have positive effects on consumer behaviour. The same argument applies today.
The simplistic multiplier calculation in any case misses out to my mind the fact that active government is trying to influence confidence as well. Whether it works or not depends on the circumstances, the tone, and the way it is done. Econometric analysis of previous efforts only tells a bit of the story. So the rapid action on VAT, home repossessions, business failures and the ilk (a) were aimed at showing the government was not going to stand by and leave everyone to cope for themselves. Those effects on confidence – hence behaviour, hence on the real economy – cannot be underestimated.
And then we come to capital spend. Ian is totally right to look for more of this. The multipliers are good and anyway investment adds to the productive capacity of the economy. But having ‘shovel ready’ projects ready is not easy, so there are always time delays that can be substantial.
In 2008-10 we moved fast where there was already a lot of thinking about what was wanted, where planning permission had already had been achieved and where the only restraint was cash. This lay behind the ‘Kick Start’ policy to get housing developments that had stalled due to the crash going again. It applied to some of the Building Schools for the Future accelerations. And some roads and other bits of infrastructure were advanced. More of this is surely possible but I doubt there is as much as Ian hopes and Whitehall is not great at pushing it through. Maybe give an increased pot to the major city regions (since the obvious delivery mechanism the RDAs have been scrapped and their replacement the LEPs, are just not up to it).
Ian suggests several ways of releasing room for capital spending by reducing current spend. I will leave him to that – they all look politically challenging and may not all be as obviously welfare enhancing as a first look suggests. Some look progressive but their impact on overall demand is not in truth clear – at least in the short term. But in any case we are in a crazy situation where necessary capital spending with a good positive return cannot be added to the economy at this point because people think the markets would panic if that happened.
Finally although in an aside Ian says that he does not necessarily believe the OBR numbers, he does base his approach assuming they are right. I continue to think that a more sensible fiscal policy will help the economy secure growth and that the output gap is not as small as the pessimists think.(b) For those who believe that growth is being unnecessarily kept low through fiscal policy, accepting the constraint that this paper imposes is not the best way to go.
Dan Corry is a former Treasury and Downing Street adviser. He is currently CEO of New Philanthropy Capital and is writing here in a personal capacity
(a) Dan Corry Labour and the Economy, 1997-2010: More than a Faustian Pact in Diamond, Patrick and Kenny, Michael (eds.) ‘Reassessing New Labour: Market, State and Society under Blair and Brown’, Political Quarterly Special Issue, Ocotber 2011 , John Wiley & Sons
(b) Corry D, Valero A and van Reenen J, ‘UK Economic Performance since 1997: Growth, Productivity and Jobs’, Centre for Economic Performance, London School of Economics & Political Science, November 2011
Responses to Osborne’s Choice Related publications
Osborne’s Choice: Combining fiscal credibility and growth
It is clear that the fiscal impact of different forms of expenditure vary greatly. As Ian points out, even the OBR – who tend to stick as close as they can to the consensus (which is almost always, as Robert Chote often tells us, wrong about the medium to long term) – believe that the multiplier for infrastructure is much higher than that for certain tax changes. So this is an important new angle to the debate that’s largely been overlooked until now.
There are good theoretical reasons why different ways of achieving a fiscal boost might have different effects. The impact of income tax cuts, unless directed at the poor (a hard task since most of the poor do not pay tax), get diluted as people save the sudden windfall and don’t spend it all, while corporation tax cuts may only improve the profits of banks and not induce more investment from the bulk of the industrial sector. Other forms of stimulus also leak abroad as some of the newly created demand is met from imports.
Of course other factors also come into play. How far can the stimulus be implemented and how quickly will it work? The need for fast action, easily delivered, lay behind some of what New Labour did in response to the recession when in government. A sharp VAT tax cut (and one that people knew would be reversed as we pre-announced it), was something that could be done fast and could and did have positive effects on consumer behaviour. The same argument applies today.
The simplistic multiplier calculation in any case misses out to my mind the fact that active government is trying to influence confidence as well. Whether it works or not depends on the circumstances, the tone, and the way it is done. Econometric analysis of previous efforts only tells a bit of the story. So the rapid action on VAT, home repossessions, business failures and the ilk (a) were aimed at showing the government was not going to stand by and leave everyone to cope for themselves. Those effects on confidence – hence behaviour, hence on the real economy – cannot be underestimated.
And then we come to capital spend. Ian is totally right to look for more of this. The multipliers are good and anyway investment adds to the productive capacity of the economy. But having ‘shovel ready’ projects ready is not easy, so there are always time delays that can be substantial.
In 2008-10 we moved fast where there was already a lot of thinking about what was wanted, where planning permission had already had been achieved and where the only restraint was cash. This lay behind the ‘Kick Start’ policy to get housing developments that had stalled due to the crash going again. It applied to some of the Building Schools for the Future accelerations. And some roads and other bits of infrastructure were advanced. More of this is surely possible but I doubt there is as much as Ian hopes and Whitehall is not great at pushing it through. Maybe give an increased pot to the major city regions (since the obvious delivery mechanism the RDAs have been scrapped and their replacement the LEPs, are just not up to it).
Ian suggests several ways of releasing room for capital spending by reducing current spend. I will leave him to that – they all look politically challenging and may not all be as obviously welfare enhancing as a first look suggests. Some look progressive but their impact on overall demand is not in truth clear – at least in the short term. But in any case we are in a crazy situation where necessary capital spending with a good positive return cannot be added to the economy at this point because people think the markets would panic if that happened.
Finally although in an aside Ian says that he does not necessarily believe the OBR numbers, he does base his approach assuming they are right. I continue to think that a more sensible fiscal policy will help the economy secure growth and that the output gap is not as small as the pessimists think.(b) For those who believe that growth is being unnecessarily kept low through fiscal policy, accepting the constraint that this paper imposes is not the best way to go.
Dan Corry is a former Treasury and Downing Street adviser. He is currently CEO of New Philanthropy Capital and is writing here in a personal capacity
(a) Dan Corry Labour and the Economy, 1997-2010: More than a Faustian Pact in Diamond, Patrick and Kenny, Michael (eds.) ‘Reassessing New Labour: Market, State and Society under Blair and Brown’, Political Quarterly Special Issue, Ocotber 2011 , John Wiley & Sons
(b) Corry D, Valero A and van Reenen J, ‘UK Economic Performance since 1997: Growth, Productivity and Jobs’, Centre for Economic Performance, London School of Economics & Political Science, November 2011