This week the International Monetary Fund argued that Keynesian short-term multipliers used in economic forecasts had been “systematically too low since the start of the Great Recession”.
The multiplier describes the relationship between changes in taxation or public spending and output. For a multiplier of 1, a $1 increase in taxation will reduce GDP by $1. For a multiplier of 0.5, a $1 reduction in spending will reduce GDP by $0.50. The higher the multiplier, the more painful deficit reduction.
The IMF justified its concern over multipliers by evaluating its April 2010 forecasts for growth. It found that in countries that planned significant fiscal consolidation, its growth forecasts were systematically too optimistic and they were too pessimistic for countries planning to let spending rise quickly or cut taxes. Read more
That is the question the new British government will ask every day until the emergency Budget in two weeks’ time.
Warning if the British public refuses to buy the “we’re all in it together” line, the government will continue the drip-drip of minor announcements about the disaster of borrowing and the possibility of London turning into Athens on Thames. The next date in this process will be on Monday, when the Office for Budget Responsibility (now with a suitably sober logo) will present its new forecast for the economy and the public finances.
Of course, the public have every reason and right to stick two fingers up to the politicians. They had an opportunity to say the deficit was a shocker before the election. We even provided a handy deficit buster to help them. But this stuff was described as scaremongering. Now it has made governing more difficult. Whatever George Osborne might claim, he does not have a mandate for public sector austerity.
That does not mean he is wrong Read more