The multiplier works

Also by Michael Burke this morning:

[A] piece of long-neglected Treasury research is its own "ready-reckoner" — Public finances and the cycle: Treasury economic working paper No 5, November 2008. This estimates two effects on government finances from a change in GDP.

The first is the improvement in tax receipts and the second is the reduction in government spending (lower welfare payments and so on). Taken together the ready-reckoner estimates that for every £1bn improvement in the economy, 75% of that will feed through to an improvement in government finances in the second year. So a £1bn increase in government spending leads to a £1.4bn increase in activity, which produces an improvement in government finances of £1.05bn. This is a positive return, which can be sued either for deficit reduction or further investment.

The argument that the only way out of recession is for the government to spend - precisely because the private sector won't - is true.

So why not spend - a lot - now?

That's the real question.

PDF of article

Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:

There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.

You can subscribe to this blog's daily email here.

And if you would like to support this blog you can, here:

Comments

When commenting, please take note of this blog's comment policy, which is available here. Contravening this policy will result in comments being deleted before or after initial publication at the editor's sole discretion and without explanation being required or offered.

Comments are closed.