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NIESR Commentary: Monetary and fiscal policy normalisation as Brexit is negotiated

In the Commentary of the November 2017 National Institute Economic Review no 242, NIESR Director of Macroeconomic Modelling and Forecasting Dr Garry Young, outlined the ways in which the decision to leave the EU has had an adverse effect on the UK economy since the vote and presents the assumptions made by NIESR in its central forecast as Brexit is negotiated. He then highlighted the preferable fiscal and monetary options in the period to come.

Dr Young wrote: “It is almost certain that the relative deterioration in the UK economy and the accompanying fall in living standards over the past year are a consequence of the vote by the British people to leave the European Union. (…) Had sterling not depreciated and the economy continued to grow at its previous rate, as would have been likely with an improving global backdrop, real household disposable income per head might have been more than 2 per cent higher than now, worth over £600 per annum to the average household.”

He added: “evidence suggests that continuing uncertainty about Brexit and the possibility of an adverse change in trading arrangements in the future is bearing down on investment and productivity now.”

 

 

 

 

 

 

 

 

 


The assumptions used in NIESR’s central forecast regarding Brexit negotiations going forward are in line with the PM’s Florence speech and include an implementation period of at least two years and a negotiated free trade in place beyond 2021. This is a relatively ‘soft’ version of Brexit, chosen “because it seems closest to meeting the objectives of both sides in the negotiations and most likely to be acceptable to the EU and UK parliaments.”

But Dr Young warned: “We do not have any great confidence that this will be the path to Brexit that will be followed. There are many possible alternatives, including the extreme possibility of a disorderly cliff-edge Brexit where the UK leaves the EU with no deal in place and no legal basis for many current activities to continue.”

Looking ahead to the Budget announcement and taking into account the downward revision of future productivity growth now forecast by NIESR, Dr Young urged the Chancellor to “make full use of the fiscal space available within the existing rules to accommodate any continued weakness in productivity” adding that “there is scope at the margins to relax fiscal austerity a little while maintaining long-term fiscal discipline”.

On monetary policy NIESR sees further steps towards ‘normalisation’ over the forecast period in order to meet the MPC’s remit to keep CPI inflation at target. But, Dr Young wrote, “according to our central forecast, interest rates will not need to rise very far to achieve that.”

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Notes for editors:

This press release is based on an article entitled “Monetary and fiscal policy normalisation as Brexit is negotiated” written by Dr Garry Young, which will be published in the National Institute Economic Review No. 242 November 2017.

This journal is a quarterly, peer reviewed, economic and social sciences journal. The full Review is published from midnight on Wednesday 1 November.

For further information, access to the full article and to arrange interviews, please contact the NIESR Press Office:

Paola Buonadonna on 020 7654 1923 / p.buonadonna@niesr.ac.uk  

NIESR aims to promote, through quantitative and qualitative research, a deeper understanding of the interaction of economic and social forces that affect people's lives, and the ways in which policies can improve them.

Further details of NIESR’s activities can be seen on http://www.niesr.ac.uk or by contacting enquiries@niesr.ac.uk Switchboard Telephone Number: +44 (0) 207 222 7665

 

Original article link: https://www.niesr.ac.uk/media/press-release-nier-commentary-monetary-and-fiscal-policy-normalisation-brexit-negotiated-13109

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