Some public sector net investment scenarios...

In a previous post on government spending I looked at public sector net investment from 2003/04 until 2011/12. Here's an updated version using the Budget 2013 forecasts through 2016/17.

The decline in 2012/13 is immediately apparent, but it's important to see that by 2014/15 spending is forecast to return to it's 2007 level. The debate is really about the the severity of the contraction since the 2010 general election, the extent to which that was an inevitable consequence of a 2009 fiscal stimulus, and the one off factors (such as transfer of Royal Mail assets) that distort the figures. What strikes me though is that I don't know any economists that would advise the government to do the above.

The chart below includes 4 scenarios:

  • The purple line (scenario 1) is the arch Keynesian "keep on spending until the economy recovers and to hell with the debt!" It's what I suspect many Keynesians believe, albeit are very reluctant to admit to. 
  • The blue line (scenario 2) treats the 2009 stimulus as a temporary injection, and maintains investment at its pre stimulus levels
  • The green line (scenario 3) acknowledges that the 2008 - 2011 spike put public debt on a new course, and therefore mirrors the rise in order to steadily return to 2004 levels
  • The orange line (scenario 4) is an ultra austerian desire to shrink the state, allow depreciation to eat up the existing capital stock, and flat line with negative net investment
  • The red line (actual) is taken from the March 2013 Budget.

I'd be really interested to know various preference orderings. My intuition is that scenario 3 would be preferred to the actual by both sides of the debate. Indeed one would think that the serious debate would be between scenarios 2 and 3. 

Source: 2003/04 - 2010/11 from PSF1 of the Public Sector Finances.


What's happened to government investment?

I'm not an expert on this data but I find spending figures as a proportion of GDP deeply flawed (since they're driven by implausible growth forecasts). So I've been trying to navigate the ONS website to find some raw figures on government investment. Here's two ways to look at it:

  • General Government GFCF - Table F of the national accounts (see here for a guide to using the national accounts, and here for our comparison of General government and private GFCF).

  • Public Sector Net Invesment (excluding financial interventions) - Table PSFN1 of the Public Sector Finances (see here for Sep 2012). If anyone knows how to download these figures in Excel, please let me know!


The point I'd make is that the dramatic cuts seen made by the coalition government (i.e. from 2010 onwards) are only "cuts" relative to the time of the fiscal stimulus of 2009. When Keynesian economists advocate fiscal stimulus they are arguing for temporary deficit financed spending. Therefore by definition a stimulus will be "withdrawn" at some point in the future. The argument against a stimulus is that it may be withdrawn prior to the economy recovering. If you say "don't withdraw it until the economy recovers" then to what extent is that a temporary programme? And both sides would acknowledge that all else equal, the higher the existing debt level the more dangerous a "permanent" fiscal stimulus is. Let's not also forget that part of the 2009 fiscal stimulus brought forward capital spending due to take place in 2010-2012. It's like me asking to be paid 2 weeks early and then in a fortnight time complaining about having a pay cut. 

I'd love someone to point out errors in my interpretation and use of the data (in particular I'd love to find a stable link to these indicators). I just think that although analysis like this is far more sophisticated than my own, to only start looking at what's happened since 2009/10 is deeply misleading. Keynesians - you got the stimulus you asked for. If you want another one I'm willing to debate that. But you can't simply pretend that the first one never happened!


UK quarterly NGDP

I've just been taking a look at the second estimate of GDP. Here's what quarterly NGDP looks like (compared to quarter of previous quarter). 

Series code: IHYO.

It's becoming increasingly hard to argue that expectations should switch to a new lower NGDP growth rate, rather than policymakers should ensure that NGDP reflects estasblished expectations. For more see Britmouse.

P.S. Here's the forecast YOY growth of NGDP from the March 2012 OBR report:


Can we measure uncertainty?

Last week saw the 7th quarterly meeting of Kaleidic Economics, and the theme was uncertainty. The report is available here. In it, we argue that attempts to measure uncertainty have insurmountable methodological flaws, but that doesn’t mean the Austrian school cannot contribute to a contemporary and progressive research agenda. In particular, we pose several questions relating to how "regime uncertainty" can be operationalised:

  • To what extent is regime uncertainty an extreme form of policy uncertainty? At what point do policy changes threaten the “regime”?
  • In terms of tax reform people tend to like changes provided they are anticipated. Very few people want the tax code to stay the way it is. Therefore stability is less important than predictability. Therefore can policy changes reduce uncertainty, provided they’re communicated clearly and help form expectations?3
  • Regime uncertainty is typically applied to the US economy during the Great Depression, and the “Great Recession”. It’s also been applied to the UK economy. On the surface, one would expect it to be especially pronounced during coups and other radical constitutional changes. It would be interesting to see cross country comparisons and detailed case studies
  • The basic idea is that a stable investment climate is important in generating confidence. But what if the present investment climate is inhospitable? To what extent can regime uncertainty lead to good economic outcomes?
  • Is it the uncertainty that’s the problem, or the prospect of worse economic policies? In crude terms can we compare regime uncertainty with regime shittiness?
  • Uncertainty doesn’t disappear when times are good, so what can we learn about the issue by comparing recessions with times of economic growth?
  • Does regime uncertainty mean that investors hold off on investment (this is argued by Bernanke 1983), or alter the types of investment they make? 

We also draw attention to measures of private investment, which we've updated:

Addendum: In the comments section Nicolas makes an important point about measuring regime uncertainty. It reminded me that I had intended to discuss this post by Lars Christensen in the report. Lars says,

My favourite source for a numerical measure of these uncertainties is the conservative Heritage Foundation’s Economic Freedom Index. We can use the sub-index for “Rule of Law” in the Economic Freedom Index as a proxy for “regime uncertainty”.

I think this makes a lot of sense, but I find it interesting to note that (i) this measure is only calculated on an annual basis; (ii) only exists from 1995; and (iii) "property rights" is on a 20 point scale so it doesn't change much. So I'm not sure how much help it is at assigning a causal role to regime uncertainty during recessions. For example, here's the "regime uncertainty" for the US since 2004:

Lars has some other great posts on regime uncertainty here and here (written by Alex Salter).



What is general government expenditure?

There is some debate at the moment about the most appropriate way to measure government expenditure. I've been especially interested in understanding the differences between the figures reported by HM Treasury, and those published by Eurostat. After several emails with the Office for National Statistics, I now understand where the Eurostat data comes from. This article provides an explanation.

General government expenditure can be found using the following steps: 

  1. Go to the ONS release for "Maastricht Supplementary Data Tables" (the most recent one is January 2013 and can be found here. As far as I can tell there's no stable URL for them so I would suggest entering "Maastricht" into the search box of the index page for all publications).
  2. Click on "Data in this release" in the top right corner.
  3. Download the excel file for "ESA Table 25 Quarterly Non-Financial Accounts of General Government Expenditure".
  4. Select Tab 2501 and look for the column "Total government expenditure" (possibly column T).

Here is a chart showing expenditure from January 2006 - December 2012:


Note that this measure of general government expenditure includes transfer payments, and it also includes the income from sales of goods and services. The latter are subtracted in order to generate Total Managed Expenditure (TME), a series that is not published by the ONS.