Are we already doing ‘Plan B’ in the UK?

Following the Q1 GDP data, there were calls from the usual politicians for the UK to switch to an economic ‘Plan B’ in place of the coalition’s planned fiscal consolidation.

Martin Wolf’s latest FT column (£££) makes a more nuanced version of the argument – in essence, that front-loaded fiscal consolidation is not credible during a recession, so pressing ahead will itself lead the market to question whether it’s politically possible to cut the deficit – and is worth a read. But it raises an interesting question for me.

Wolf points out that the government is already on course to miss its original fiscal targets set out after the election, but this hasn’t led the market to question our solvency:

Yet remember that when the chancellor announced his fiscal plans in 2010, net borrowing was supposed to be just £206bn between 2012-13 and 2015-16. In the March 2012 Budget this was up to £317bn. Did that colossal failure to hit his target destroy credibility and so lead to explosive increases in bond yields? No.

Entirely valid. But I would interpret this failure to hit the deficit targets slightly differently.

Remember, in a modern welfare-state economy, much of the fiscal stimulus during a recession comes through ‘automatic stabilisers’ (falling tax revenue, rising spending on unemployment benefits, etc) rather than conscious government actions. These can be important: note that the UK’s fiscal stimulus announced in late 2008 was meant to be a £20bn package, but public sector net borrowing actually increased by more than £80bn between 2008 and 2009, of which about £40bn was down to equity injections into RBS/Lloyds – so half of the non-bailout part of the increase in the 2009 deficit was not due to a conscious decision by the Chancellor.

And it’s these automatic stabilisers, rather than any deliberate relaxation of the government’s fiscal plans, that will have led to the changes in the fiscal projections in the next few years – reflecting the extent to which the economic environment (in the UK and abroad) has deteriorated over the last 6-12 months.

As a result of what we can call this ‘non-deliberate fiscal stimulus’, as Martin Wolf in fact separately points out on his blog, the path of the UK’s fiscal consolidation has actually now switched to something quite close to Alistair Darling’s original pre-election budget proposals:

Therefore, without the need for any deliberate decision by the coalition, can’t one argue that we’re already in the process of switching to a sort of ‘Plan B’ in UK?…

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