fiscal deficit

“A strengthening in the fiscal balance by 1 percentage point of GDP is, on average, associated with a current account improvement of 0.2–0.3 percentage points of GDP.” This is the conclusion from a top notch set of researchers, posted on VoxEU.

With renewed focus on global trade imbalances, this may be of interest to policymakers currently looking at exchange rates. The finding holds across emerging and developed economies, though the “association is significantly higher when output is above potential.” Food for thought.

Here is a simple calculation. The German Green Party is saying Dominique Strauss Kahn told parliamentarians in Berlin that Greece might need loans of up to €120bn or nearly four times its 2009 budget deficit. Apply the same ratio to Britain, and you soon see, the UK could never go to the IMF if it cannot finance its public debt. The sum required would be £652bn or roughly $1,000bn – more than the Fund’s funds.

If, as the Conservatives suggest, anything other than a Tory victory would see Britain banging on the IMF’s door, think again. Default and restructuring is much more likely than going “cap in hand” to the Fund.

Robin Harding

Some interesting thoughts on Japan’s monetary policy and fiscal deficit from the ‘shadow’ policy board run by Nomura Research Institute.

Is it the gunfight at the OK Corall? Or Ali vs Fraser? Or perhaps King Kong against Godzilla? Choose your own inappropriate metaphor, but today’s letters from more than 60 economists to the FT arguing strongly against major action to cut the deficit this year has clearly touched a nerve in what is perhaps the biggest issue facing the UK economically and politically for the next few years.

Following the letter by 20 economists to the Sunday Times at the weekend, today’s letters highlight the division in the economics profession between fiscal hawks and those who are more worried about the economy’s ability to restart after one of the deepest recessions of modern times. Read more