Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday 16 July 2012

Getting the timing so wrong

                The UK government announced new public investment in the railways today – but not to start until at least 2014! The IMF’s revised forecast for UK growth this year is 0.2%, with only 1.4% in 2013. As Stephanie Flanders notes, the IMF seem somewhat schizophrenic about what should be done about this – publishing reports that clearly spell out how UK policy (monetary and fiscal) is too restrictive, but at the same time apparently praising the current government’s stewardship. (Note that the government sets the inflation target for monetary policy, so any move to raise this or replace it with a nominal GDP target has to come from them.)
                Chris Dillow looks at how countercyclical public investment has been in the past, and comes to the perhaps surprising conclusion that it has been more countercyclical since 1980 than before. He therefore describes, with characteristic mischief, current policy is a return to pre-Thatcherism. But his chart stops where the data finishes, so I thought I’d focus on the recent past and add current government plans, as seen by the Office for Budget Responsibility.

UK Public Gross Investment, as a percentage of GDP. Source OBR.[1]

                We can see how the previous government did the right thing in increasing public investment as a share of GDP as the recession hit. It too was planning to reduce public investment substantially in later years, but to be fair in 2009 you could argue that by 2012 the recession might have been over. But ignore the politics – both the economics and the finance tell you that now is the time to have a high share of public investment in GDP. What history will say, about this and so much else, is that governments gave up on stimulus much too soon. Below is the underlying (cyclically adjusted) primary budget balance for the UK, as calculated by the OECD.

UK Underlying Primary Budget Balance, OECD Economic Outlook

                Is the best we can now hope for some additional spending in two years time? I refuse to believe that it takes so long to organise any additional public investment. Towns and villages across the country are currently suffering from flooding because of inadequate flood defences, in part according to this report because of flood defence projects that were ready to go but have not received funding. But no, I’m being silly – such public investment would just crowd out the private investment necessary to clean up the mess after the floods.    

[1] The published 2012/3 figure is only 1.2% of GDP, but looking at the small print that seems to be an oddity to do with the Royal Mail’s pension fund. (Don’t ask me to make sense of this.) Trying to adjust for this suggests a figure of 3%, which is what is in the table above.


  1. "I refuse to believe that it takes so long to organise any additional public investment"

    Only someone who has never experienced the EU public procurement regulations could write that way.

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