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Authors: Robert Chote
If the picture painted by the Treasury in this year's Budget is correct, we are currently suffering a "bust" without having enjoyed a "boom". The official story is that after the dramatic ups and downs of the late 1980s and early 1990s, the current government kept activity in the economy impressively close to its "Goldilocks" level - neither too hot nor too cold - until a virulent strain of banking flu arrived unpredictably from the US and pushed us into recession, as well as sharply reducing the economy's long-term productive potential.
We can see this version of history in Chart 1. This shows the Treasury's estimates of the "output gap" - the difference between the actual level of economic activity and the Goldilocks level consistent with stable inflation. At the time of last year's Budget, activity in the economy was expected to remain pretty close to its sustainable level. In this year's Budget we see the Treasury permanently reducing its estimate of that sustainable level by 5% (or £70 billion in today's money) between mid 2007 and mid 2010, relative to the path assumed in last year's Budget. It then expects the actual level of activity to fall another 5% below even that reduced estimate of the economy's potential.
This picture helps the Treasury explain: first, why we are about to see such a dramatic increase in government borrowing, and; second, why a large proportion of that extra borrowing will not disappear without a policy squeeze as the economy returns to its Goldilocks state. But those of a cynical disposition may suspect that this particular depiction of history is also designed to avoid casting an unflattering light on the quality of macroeconomic management during Gordon Brown's decade as Chancellor of the Exchequer leading up to the crisis.
An alternative view of history is that the productive potential of the economy did not go into sudden and unpredictable decline in mid-2007, but rather that the Government - among many others - consistently overestimated the potential of the economy in the good years, lulled into a false sense of security by global disinflation.
We can see this version of history in Chart 2. As an alternative to the Treasury's belief that the productive potential of the economy grew by almost 3½% a year in Labour's first term and then by roughly 2¾% a year thereafter until the crisis hit and trend growth fell to 1% a year for three years, we can assume that the productive potential of the economy grew at 2.6% a year throughout. We would still expect to see economic activity running 5% below its potential in 2010, as the Budget predicts, but we would also see that it had been running roughly 3% to 4% above potential from 2000 to 2007.
If the considered view of history is that the Treasury missed a boom of this magnitude, it will cast a much less flattering light on Mr Brown's record as Chancellor. It would certainly suggest that he should have been running a much stronger fiscal position during this period. But it also poses much more awkward questions about the goals of monetary policy. During this period the Bank of England's Monetary Policy Committee was instructed to keep retail or consumer price inflation low and stable - and did a much better job that most people would have predicted beforehand. The Treasury's view that the economy was at its Goldilocks level in 2006-07 was also supported by a range of evidence that overall pressures on retail price inflation were subdued.
If the missing boom manifested itself in asset and credit markets - rather than those for labour, goods and services - then to do what we can to promote stability in the future the Bank will have to be given a rather more opaque and multi-faceted target to pursue than it has been required to pursue to date.
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Cutting the deficit: three years down, five to go?
The UK is in the fourth year of a planned eight-year fiscal tightening. Following further announcements made in Budget 2013, this fiscal consolidation is now forecast to total £143 billion by 2017–18. The UK is intending the fourth largest fiscal consolidation among the 29 advanced economies for which comparable data are available. By the end of this financial year, half of the total consolidation is expected to have been implemented. However, within this tax increases and cuts to investment spending have been relatively front-loaded, while cuts to welfare spending and other non-investment spending have been relatively back-loaded.
The March Budget forecast that borrowing would fall by £0.1 billion from £121.0 billion in 2011–12 to £120.9 billion in 2012–13. On Tuesday, the Office for National Statistics is due to release its first estimate of public sector net borrowing in March 2013 and, therefore, for the whole of 2012–13. Borrowing could easily end up being higher or lower than it was in the previous year, either due to backwards revisions, the uncertainty inherent in forecasting borrowing even a month in advance, or both. However, whether borrowing is slightly up or down in cash terms is economically irrelevant. Either way, the bigger picture is that having fallen by roughly a quarter between 2009–10 and 2011–12, borrowing is forecast to be broadly constant through to 2013–14.
Women working in their sixties: why have employment rates been rising?
Employment rates through the recession have been remarkably robust, with today’s ONS figures showing employment remaining close to 30 million. The young have experienced historically low employment rates and high unemployment rates but the employment rate of women aged 60 to 64 has increased as fast since 2010 as it did during the 2000s. An important explanation is the gradual increase in the state pension age for women since 2010, which has led to more older women being in paid work. Without this policy change, the employment rate for 60 to 64 year women would have been broadly flat since 2010.