Fiscal Consolidation Flashcards
Week 5
Give some context around the 2008 Great Financial Crisis for the UK?
- 63 quarters of expansion, UK GDP declined for 5 quarters
- GDP shrunk by over 6% from Q1 2008 and Q2 2009
- Budget deficit rose by 4x to £157bn
- It took 5 years to return to pre-recession size
- Slow recovery from 2010 onwards (ONS)
Give the implications on unemployment of the 2008 GFC
- Approximately 2.7m were unemployed in December 2011
- Quarterly unemployment rate rose from 5 - 8.4%
- Took over 7 years to return to pre-pandemic level
Give the implications on inflation/real wages of the 2008 GFC
- UK experienced falls in real wages (atypical)
- Median workers wage fell from 8-10%
- The pain wasn’t equally felt [youth harmed]
Give the implications on GDP per Capita of the 2008 GFC
- Fall of around £5,900 pre-crisis
- Largely caused by productivity puzzle (0.3% Vs. 2%)
- 11% bigger from 2008-2018, but 16% smaller than pre-pandemic
Give the implications on public finances of the 2008 GFC
- Budget deficit quadrupled (2.6% -> 11%) to £157bn
- IFS saw increases in spending from 38.9% to 44.9% and reduce tax rate from 36.2% to 35%
- Net debt rose from £291bn to 56.4%
What was some of the interventions from 2007-2009 (BAILOUTS) ?
- Labour stepped into bail out banks and offer support to the sector
- £137bn spent to provide loans, most of which have since been repaid to banks
- Government unpopular in many cases
- Net £27bn loss
Name some of the key fiscal measures taken by the Government in response to the GFC
- Temporary cut of VAT to 15%
- Changes in income tax and personal allowances
- Bringing forward £3bn of capital spending
- Age related payments, increases capital allowance …
- Led to a rise of GDP of about 1.5% (half spending and half tax)
- HOWEVER: only a small proportion of the increase in borrowing (1.3%) was down to discretionary fiscal stimulus
What was the aim of the Coalition Government of 2010? What was the plan?
- Principal aim of reducing the deficit
- Main burden of deficit reduction on smaller Government spending, not tax rises
- Much-faster than Labour’s plan
- HOWEVER, this leads to falls in quality of public services
What is austerity?
- Austerity is reducting the deficit and achieving the required primary surplus by reducing public spending and/or raise taxes
- Conservatives likely to reduce public spending
Why was pre-consolidation important? What was some of the key facts about it?
- Growth resumed after Q3 2009 and rose in 2010
- £ was remarkably stable across the period
- The economy was weak
- Austerity makes an economy too weak originally
Who was the Chancellor in 2010? What did he state must be done?
- George Osbourne
- Called it a ‘new economic model’ of dealing with debt today
- Argued that debt must be dealt with, or the markets will panic
Evaluate the validity of Osbourne’s statement using BoE bond yields
- Bond yields are key indicators of investor confidence
- If investors are very worried, they will require a higher IR
- Bond yields were reducing, and sat at around 3-4%
- This implies that there wasn’t much market panic due to strong demand for UK govt. bonds
Why was there non market panic despite rising debt levels?
- QE: UK Govt. bonds were demanded by the central bank
- Bank reserve requirements increased
- Strong demand for UK govt. bonds
- Expectations of future policies and actions
Why was the UK never in the same struggle as Greece/other weaker eurozone nations?
- Free Central Bank and autonomy not like the ECB
- Own currency and monetary policy autonomy
- BoE acted as a lender of last resort, unlike the ECB [until Jan 2012]
- This made investors lose confidence in Greece but not the UK
What was the Plan of the UK Government to aid recovery?
- In 2010, UK had the largest budget deficit since WWII [strcutral and cyclical]
- Structural deficit was 8.5% larger than believed
- June Budget stated they would do 6.7% consolidation
- VAT (regressive) raised by 2.5% and public sector spending fell
