A new research note from the TPA today uses the Beacon Economic Forecasting Quarterly Macroeconomic Model of the UK and International Economies (BEFMOD) to look at the likely economic effects of a relatively rapid fiscal consolidation. It forecasts the effects of the kind of spending cuts that we have outlined in a report with the Institute of Directors and updated for the book How to Cut Public Spending.
While the model does expect a hit to growth in the short term, the improvement in the public finances would be so dramatic that it would make room for tax cuts by the end of the Parliament. By the end of the forecast period, in 2020, with spending and tax cuts unemployment would be lower; GDP would be higher; the public sector debt stock would be far lower and the public finances would be in surplus instead of still being in deficit.
Here are some of the key results, click for a bigger version:
And there are reasons to think that the economic effects of spending will be particularly positive at the moment. First, because if businesses think that their returns tomorrow will be taxed to pay for today's borrowing then that will put them off investing and hit the recovery, there is good reason to think people are particularly aware of the need to pay for deficit financed spending at the moment. Second, because high spending has an impact on the trend rate of growth that often does not come through in economic models but has been found by a number of academic and official studies. An earlier TPA research note found that higher spending over the last decade could be depressing the trend rate of growth by as much as 1.53 percentage points.
After tomorrow's Emergency Budget we'll be furiously working away at the TPA offices to analyse the measures announced. On Wednesday at 10.00am, we'll be going through our findings, and commentators like John Redwood MP and City AM Editor Allister Heath will give their take, at our post-Emergency Budget Briefing with the IEA. You can still register to attend here.
