The macroeconomic implications of the parties' fiscal plans - NIESR
The macroeconomic implications of the parties' fiscal plans
As we approach the UK’s General Election this May, the economy, and in particular the path and pace of fiscal consolidation over the next Parliament, will dominate the political debate. While it is clear that the next parliamentary term will be one of considerable fiscal consolidation, there is nevertheless ample scope to deviate from the Coalition's plans.
Understanding the implications of the political parties’ fiscal policy proposals should therefore be an important feature of the political debate. Discussion has so far focused on what the major parties’ announcements mean for public sector borrowing and the possible impacts for public services, tax and welfare spending. These are vitally important topics, but fiscal policy is first and foremost a macroeconomic policy instrument – it is designed to influence the future path of the economy as a whole.
New analysis out recently by Simon Kirby, a Principal Research Fellow at NIESR, looks at the impact of alternative fiscal paths on the wider economy via macroeconomic variables such as economic growth, interest rates and unemployment. We examine these through a series of illustrative simulations using NIESR’s global econometric model, NiGEM. This enables us to simulate the dynamic process of the economy, and allows for feedback to the public finances.
NIESR's latest forecasts for the UK and global economies, which takes the Coalition Government's fiscal plans as given, are used as the baseline. We then illustrate how fiscal plans could vary in line with the announced policies of fiscal targets of each party:
- The Conservative party has announced its ambition to reach an absolute surplus. We have introduced two scenarios for the Conservative party, since they also have a stated aim to reduce welfare spending by an additional £12 billion.
- The Labour party has announced that it will target a surplus on the public sector's current budget in the next parliament.
- The Liberal Democrats’ ambition is to run a cyclically-adjusted current budget that is in balance.
Under both the Labour and Liberal Democrat fiscal targets, public sector borrowing would be used to fund investment. The Office for Budget Responsibility (OBR) forecasts a closing of the negative output gap by 2019-20; that implies that the cyclically-adjusted current balance and the actual current balance will be the same, leaving no difference between the stated fiscal targets of the Labour and Liberal Democrat parties by the end of the next parliament. The scenarios we run for them are therefore identical.
The table below shows the impact of each parties' plans compared to the forecast baseline.
NIESR’s analysis highlights the near-term positive effects to GDP growth, real consumer wages and unemployment that stem from the implied alternative plans to the current Coalition government’s. These alternatives are funded via greater borrowing/smaller surpluses than implied by the Coalition’s plans. At the same time, we would expect the Bank of England to respond by raising interest rates, thereby dampening some of the positive macroeconomic effects. The positive effects on the level of GDP are only temporary; in each scenario, in the longer-run the GDP is unchanged from its baseline level.
Undoubtedly, the parties themselves will disagree with aspects of our analysis. On one level they are correct: each will have a different set of priorities if elected, and the precise tax and spending decisions introduced will reflect those. However, given announcements to date, it is our view that this is a fair reflection of the potential macroeconomic impacts of their different approaches.
The next government should expand the remit of the OBR to include responsibility for the auditing of all parties’ manifestos. If given the appropriate resources and authority by Parliament, the OBR could help to improve significantly the quality of information on parties’ tax and spending plans in the run-up to future general elections.
Notes for Editors:
- This press release is based on an article entitled “The macroeconomic implications of the parties' fiscal plans”, written by Simon Kirby, and contained in the National Institute Economic Review No. 231 February 2015. This is a quarterly, peer reviewed, economic and social sciences journal. The full Review was published last night Tuesday 10 February.
- For a copy of the article, or to organise an interview, please contact Brooke Hollingshead in the NIESR press office on 020 7654 1923 /email@example.com
- To discuss the article please contact:
For further information:
National Institute of Economic and Social Research
2 Dean Trench Street
London, SW1P 3HE
Switchboard Telephone Number: +44 (0) 207 222 7665
Latest News from
IFS - Economic downturn and wider NHS disruption likely to hit health hard – especially health of most vulnerable09/04/2020 13:35:00
The coronavirus pandemic poses clear and obvious dangers to the health of individuals who are infected with the virus. But worsening economic conditions and disruptions to NHS services will have important and far-reaching consequences for the health of the broader population.
Minimum pricing had no impact on alcohol-related deaths in Scotland, says new IEA briefing09/04/2020 12:35:00
Minimum pricing had no impact on alcohol-related deaths in Scotland in the eight months after it was introduced, reveals the Institute of Economic Affairs
IFS - Many better-off households may increase savings as spending on 'banned' activities falls. Poorer households spend much more of their income on necessities and will be less resilient to any falls in income09/04/2020 11:35:00
The current crisis will have a big effect on the incomes of a lot of people, but it will also affect their spending.
IEA - Trump right to consider suspending WHO funding09/04/2020 10:35:00
Christopher Snowdon, Head of Lifestyle Economics at the Institute of Economic Affairs, responded to Donald Trump’s comments on the World Health Organisation
IFS - Sector shut-downs during the coronavirus crisis affect the youngest and lowest paid workers, and women, the most09/04/2020 09:35:00
The lockdown in response to the coronavirus pandemic has effectively shut down a number of sectors. Restaurants, shops and leisure facilities have been ordered to close, air travel has halted, and public transport has been greatly reduced.
Kings Fund - Public satisfaction with the NHS rose sharply in 201907/04/2020 10:35:00
New analysis published by The King’s Fund and the Nuffield Trust shows public satisfaction with the NHS jumped to 60 per cent across the UK in 2019, up 7 percentage points from the year before.
COP26 Postponed: Right decision, but the UK mustn’t ignore its climate targets or leadership role, says IPPR07/04/2020 09:35:00
Plan for the post-Covid-19 crisis economic recovery must be for a low carbon ‘clean recovery’
IEA - Government jobs scheme gives business “wrong incentives”02/04/2020 13:35:00
IEA responds to figures from the British Chambers of Commerce
IFS - Fast choices by government provide generous income support to most workers, but leave some with nothing and others with too much02/04/2020 12:35:00
The government is running two large schemes – the Job Retention Scheme (JRS) for employees and the Self-employment Income Support Scheme (SEISS) for the self-employed – and providing more generous benefits in an attempt to protect workers against income losses resulting from the coronavirus.