Nice article, thanks - especially the multiplier values.
But I do wonder a bit about spending. I superficially know the Keynesian approach but I'm not very well-versed... my understanding is that he advocated effectively CapEx, infrastructure spending to create jobs to underpin the economy now, knowing there will be a return on that investment which will boost the economy later, too.
Government debt interest, now back at around the 4% yield levels, accounts for the majority of our forecast budget deficit in 24/25 (around £90 bn of our roughly £100 bn deficit). This does also mean that government spending, excluding debt interest, is relatively close to our tax receipts of around £1.1 trillion.
But unless we want to keep issuing new debt to keep paying the existing debt interest, surely we have to generate a surplus at some point. And presumably there is no ROI, and only a small multiplier on welfare payments, as they are not creating jobs or economic growth, beyond sustaining a certain level of demand / consumption in the economy.
So isn't there an argument for cutting government expenditure in the areas which aren't supporting economic growth, if we can't grow the economy to increase tax receipts? This isn't too far removed from the Cameron/Osborne ethos
Hey, thanks for the comment. On Keynes (as I understand) there’s two types of government spending in play – one to boost demand in a recession, which is short-term and about getting money to people to spend (dig holes and fill them in, etc.); and the other is about public spending on investment to increase the potential size of the economy in the long-term.
To the wider point on cutting spending, it’s quite difficult to assign specific multipliers to different types of spending and I imagine there are lots of feedback loops, particularly on welfare i.e. you cut one benefit here, you increase another elsewhere.
That is very true - for example, pushing people out of hospital beds and into care in the community might move costs from NHS to social care, and one cost may be lower than the other, but bringing one down pushes the other up.
However, in the UK, growth is NOT higher than the cost of debt. £90bn interest on roughly £2.8 tn of debt is around 3%, GDP growth is more like 1% - 2%. And with yields of 4%, borrowing costs are going up, not down.
So in the UK's case, the return on capital needs to be considered very carefully for each element of expenditure or new debt issuance. Hence reducing spending is as important as stimulating growth (in my opinion)
Need to think about the growth of nominal GDP though as that's the basis of tax receipts and it's what used for the debt to GDP ratio. OBR forecast nominal GDP growth (so real GDP plus rise in prices) to average 3.8% from 2024-25. Labour obviously think they can get it higher with structural reforms. Borrowing costs in the short term definitely going up; but lots of short term debt issued during covid so if rates come down there is scope to take advantage of this. I do completely agree though that growth is ultimately the key (not just inflating away the debt) and the UK doesn't have lots of headroom so important to think about the efficacy and return on spending. Unfortunately that can often be more art than science when it comes to stuff like infrastructure and capital investment!
That's a very good point, I had overlooked the nominal vs real argument - the UK has very little inflation-linked debt, so you're right that nominal growth, in this instance, is more relevant.
Thanks - some good food for thought. Let's hope our politicians are also skilled artists! 😂
Nice article, thanks - especially the multiplier values.
But I do wonder a bit about spending. I superficially know the Keynesian approach but I'm not very well-versed... my understanding is that he advocated effectively CapEx, infrastructure spending to create jobs to underpin the economy now, knowing there will be a return on that investment which will boost the economy later, too.
Government debt interest, now back at around the 4% yield levels, accounts for the majority of our forecast budget deficit in 24/25 (around £90 bn of our roughly £100 bn deficit). This does also mean that government spending, excluding debt interest, is relatively close to our tax receipts of around £1.1 trillion.
But unless we want to keep issuing new debt to keep paying the existing debt interest, surely we have to generate a surplus at some point. And presumably there is no ROI, and only a small multiplier on welfare payments, as they are not creating jobs or economic growth, beyond sustaining a certain level of demand / consumption in the economy.
So isn't there an argument for cutting government expenditure in the areas which aren't supporting economic growth, if we can't grow the economy to increase tax receipts? This isn't too far removed from the Cameron/Osborne ethos
Hey, thanks for the comment. On Keynes (as I understand) there’s two types of government spending in play – one to boost demand in a recession, which is short-term and about getting money to people to spend (dig holes and fill them in, etc.); and the other is about public spending on investment to increase the potential size of the economy in the long-term.
In terms of whether this spending is sustainable, one of the key points is that so long as the nominal GDP growth rate exceeds the nominal cost of debt, then all else equal, the ratio of debt to nominal GDP falls. You don’t need to run a budget surplus to pay down debt if nominal growth is high enough (here’s a better explanation - https://www.cbpp.org/research/difference-between-economic-growth-rates-and-treasury-interest-rates-significantly-affects).
To the wider point on cutting spending, it’s quite difficult to assign specific multipliers to different types of spending and I imagine there are lots of feedback loops, particularly on welfare i.e. you cut one benefit here, you increase another elsewhere.
That is very true - for example, pushing people out of hospital beds and into care in the community might move costs from NHS to social care, and one cost may be lower than the other, but bringing one down pushes the other up.
However, in the UK, growth is NOT higher than the cost of debt. £90bn interest on roughly £2.8 tn of debt is around 3%, GDP growth is more like 1% - 2%. And with yields of 4%, borrowing costs are going up, not down.
So in the UK's case, the return on capital needs to be considered very carefully for each element of expenditure or new debt issuance. Hence reducing spending is as important as stimulating growth (in my opinion)
Need to think about the growth of nominal GDP though as that's the basis of tax receipts and it's what used for the debt to GDP ratio. OBR forecast nominal GDP growth (so real GDP plus rise in prices) to average 3.8% from 2024-25. Labour obviously think they can get it higher with structural reforms. Borrowing costs in the short term definitely going up; but lots of short term debt issued during covid so if rates come down there is scope to take advantage of this. I do completely agree though that growth is ultimately the key (not just inflating away the debt) and the UK doesn't have lots of headroom so important to think about the efficacy and return on spending. Unfortunately that can often be more art than science when it comes to stuff like infrastructure and capital investment!
That's a very good point, I had overlooked the nominal vs real argument - the UK has very little inflation-linked debt, so you're right that nominal growth, in this instance, is more relevant.
Thanks - some good food for thought. Let's hope our politicians are also skilled artists! 😂