In February 2010, just before the May General election, 20 economists wrote a letter stating: “in order to be credible, the government’s goal should be to eliminate the structural current Budget deficit over the course of a parliament, and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-2011 fiscal year.” The newly appointed Chancellor, Osborne, hailed their letter as a “really significant moment in the economic debate”. Shortly after the current UK government came into power in 2010, the Treasury predicted that GDP would rise by approximately2.5% in 2012 and 2.7% in 2013. However, GDP increased by only 0.4% in 2012 and started to recover only in 2013, almost 5 years after the beginning of the financial crisis. Moreover, the impact of deficit reduction measures from the Government on the public sector debt has been widely questioned.
In the light of the data and the economic debate, provide a report to the Chancellor to explain:
1. Given weaker than expected growth and heavy borrowing, what would your advice be to the Chancellor on policies to promote growth? This gets to the heart of the issue. There is no ready answer, but you have to weigh up the issues. The key point is the relationship between growth and debt reduction. Should we delay the government’s debt reduction plan in order to stimulate the economy through fiscal policy, bearing in mind that the deficit may increase anyway because of weaker than expected growth? You have to show you understand the different schools of thought, what they suggest about the roles of fiscal policy and the implications for policy. The hard part is to demonstrate sufficient analytical rigour (don’t waffle), but at the same time write in a style that policy makers will understand.
To be able to do this, you need to read widely. You cannot do this properly without understanding, in depth, the issues yourself.
See how the Treasury, IMF and World Bank write for example. Look at the Krugman article.
You are not trying to be evangelical, but present the arguments fairly .
You do need to produce policy recommendations. But this section must be based on the evidence rather than your personal preferences. This is evidence-based policy. For instance, if you want to recommend more PE, what type and why?
2. Would your recommendations be different if you were advising the Italian and French governments? This part is really about differences between countries:
– Their debt conditions– you can get data from IMF, OECD or World Bank web sites;
– Their monetary policy frameworks.
This affects the credibility of policies and the interest rates that will have to be paid by different governments at different debt levels.
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