Garry Young

The macroeconomic impact of UK withdrawal from the EU

We contribute to the ongoing debate about the benefits to the UK economy of membership of the European Union by assessing the macroeconomic consequences of withdrawal using simulation analyses on the NIESR macroeconometric model of the UK economy under endogenous fiscal and monetary policies. We draw on research that highlights the role of EU policies in the level of international trade and investment undertaken by Member States, and the implications of those international linkages for long-term productive potential. UK living standards would be adversely affected by withdrawal, largely due to a decline in the level of technical efficiency resulting from a lower future level of inward foreign direct investment.

The Performance of National Institute Economic Forecasts

Economic forecasts are usually presented as point estimates, despite the margin of uncertainty which surrounds them. In November 1995 the National Institute began to present estimates of the probability of the governments inflation target being met and of there being a fall in GDP. This article describes the methods that we use for calculating these probabilities. We show, by studying eight successive forecasts of the same event, how forecast reliability improves as the forecast horizon approaches and demonstrate that this can be explained in terms of the accumulation of information about the state of the economy.

The Financial Crisis, Bank Lending and UK Productivity: Sectoral and Firm-Level Evidence

This paper assesses the evidence and investigates some of the mechanisms by which the most recent banking sector crisis might have affected the supply side of the UK economy. We find clear evidence that the banking sector crisis affected credit supply to businesses and caused bank lending to decline. But we do not find much evidence of the heterogeneity in performance between different industrial sectors that would have been expected if banking sector impairment had been the key factor holding back productivity growth. Consistent with this we do not find strong evidence that a lack of reallocation of resources across businesses has been a substantial drag on productivity growth.

A cross-country comparison of the demand for labour in Europe

A Cross-Country Comparison of the Demand for Labour in Europe.-This paper investigates structural differences in the demand for labour in France, Germany, and the UK. It finds substantial differences in the sensitivity of the demand for labour to international product demand and factor prices in all three countries. In particular, it reacts to domestic factor prices in Germany but international cost competitiveness in France and the UK; it depends upon European-wide product demand in France and Germany and a wider measure of product demand in the UK. The authors attribute these differences to product market conditions and institutional factors rather than to differences in the production technology.ZusammenfassungEin länderübergreifender Vergleich der Nachfrage nach Arbeit in Europa. -Die Verfasser untersuchen die strukturellen Unterschiede der Nachfrage nach Arbeit in Frankreich, Deutschland und dem Vereinigten Königreich. Es gibt beachtliche Unterschiede im Hinblick darauf, wie die Nachfrage nach Arbeit auf die internationale Güternachfrage und auf die Faktorpreise in den drei Ländern reagiert. Stellt man auf die Kosten ab, so reagiert die Nachfrage nach Arbeit in Deutschland deutlich auf die heimischen Faktorpreise, in Frankreich und Großbritannien dagegen auf die internationale Wettbewerbsfähigkeit. Stellt man auf die Güternachfrage ab, so hängt die Nachfrage nach Arbeit in Frankreich und Deutschland von der europaweiten Güternachfrage ab, in Großbritannien dagegen von einer umfassender gemessenen Güternachfrage. Die Verfasser führen diese Unterschiede auf die Bedingungen der Gütermärkte und auf institutionelle Faktoren zurück und weniger auf Unterschiede in der Produktionstechnologie.

The State of the Public Finances

The public sector borrowing requirement (PSBR) was £36-7 billion (6 per cent of GDP) in the last fiscal year and was forecast by the government in the March Budget to rise to £50 billion (8 per cent of GDP) in the current fiscal year. Yet as recently as 1988/9, the public sector was able to make a debt repayment of £14-7 billion (3 per cent of GDP). Such a large change has prompted concerns about the present state of the public finances and indeed caused the government to set in place future increases in taxation designed to ameliorate the situation. The purpose of this note is to assess the sustainability of the current fiscal position. In doing this we pay par ticular attention to the development of the stock of public sector debt in relation to national income and the public sectors stock of capital. Whereas the PSBR measures the amount of borrowing the public sector needs to do within a particular period, the debt stock measures the total amount of obligations to pay interest that the public sector has outstanding. It is this concept that is most useful in discussing the sustainability of fiscal policy. The ultimate constraint on the budgetary decisions of the public sector is that it is able to pay the interest on its debt. Interest payments will tend to rise in line with the debt stock and, for given interest rates, will tend to rise as a proportion of GDP when the debt stock is rising as a proportion of GDP. Such a situation is not sustainable: ultimately the public sector would be forced to change its budgetary policy or repudiate its debt. It is also important to examine the relationship between the evolution of the public sectors debt stock and the amount of capital it owns. Public sector capital assets typically provide services over a number of years. Some investments, such as council houses, generate future revenue for the public sector. Other items of cap ital expenditure, such as expenditure on roads, do not (as yet) provide a direct source of future revenue. In either case it can be argued that it is appropriate for the public sector to finance such capital expenditure by borrowing and that the revenue required to finance the interest payments on the resulting debt will become due in line with the services provided by the capital. For capital that generates revenue, the revenue itself can be used to cover the interest. For capital that does not generate revenue, the tax levied to finance interest payments can be seen as a payment for services provided. We begin by considering the proximate causes of the sharp change in the state of the public finances since 1988/89 and attempt to quantify the extent to which those changes are related to the general economic cycle. Cyclical changes in the fiscal position are less worrying than other more structural changes since there is a tend ency for them to be reversed as the economy recovers, ensuring that they do not have a long term adverse effect on the debt stock. Our estimates suggest that around 2Vi percentage points of the 9 percentage point swing in the PSBR/GDP ratio since 1988/9 can be directly attributed to the econ omic cycle. Borrowing is presently being used to finance both current and capital spending, with non-oil tax rev enues some 2 percentage points lower, as a proportion of GDP, than at the trough of the previous two recessions in the UK. In this light the recent decisions to restrain public sector pay and announce future tax increases appear to have some justification. We also examine the long-run trends in the PSBR over the last two decades and attempt to isolate the factors that have led to a generally lower rate of borrowing. If it is reasonable to expect these factors to continue then the recent increase in the PSBR might be viewed as a tempor ary aberration about a gradual downward trend. Finally we consider the future prospects for the public sector finances using the Governments own projections for its spending and tax plans together with our forecast for the development of the economy more generally. This makes it possible to calculate the likely path for the ratios of both the debt stock and the capital stock to GDP in the medium term on the basis of the announced budgetary policy of the government. Our analysis suggests that the current fiscal policy is sustainable, in that the forecast suggests that the recent actions announced by the government will tend to stabil ise the PSBR at some 2Vi per cent of GDP by the late-1990s, with the ratio of general government gross debt to GDP tending to 50 per cent. We also explore the impact on the fiscal position of a failure by the govern ment to implement its announced policies. This shows that the actions that the authorities presently intend to undertake are necessary to prevent the outlook becoming significantly worse. A comparison of the changes in the components of the PSBR in the prospective recovery with those in earlier

The UK Productivity Puzzle 2008-13: Evidence from British Businesses

In many larger advanced economies labour productivity growth slowed sharply and remained subdued for years after the credit crisis of 2007/08. Nowhere was this more obvious than in the United Kingdom. We examine the dynamics of productivity among British businesses that lie behind this stagnation. The most striking feature is the widespread weakness in total factor productivity within firms, pointing to the importance of a common factor in explaining productivity weakness. In addition,we find that the positive correlation between surviving firms’ employment growth and their relative productivity ranking broke down after 2007/08, as would be expected if an adverse credit supply shock had caused inefficiencies in resource allocation across firms. Indeed, during the immediate recession years 2008/09, this shift was most apparent in sectors with many small and bank dependent businesses. But subsequently, while the contribution of external reallocation to aggregate productivity growth in 2010/13 was smaller than in previous years, this was not obviously associated with sectoral bank dependence. We illustrate the sensitivity of these findings to the choice of decomposition method.

The UK Public Finances: Past Experience and Future Prospects

Introduction One of the more troubling aspects of economic perform ance in the UK since the recession has been the persistence of high levels of public sector borrowing. Borrowing reached a peak of 7.1 per cent of GDP in 1993-94 and has since fallen to 4.5 per cent in 1995-96, with a further fall to 3 Vi per cent in prospect for this year. Continued bor rowing at high levels has raised public sector indebted ness. On the Maastricht treaty definition, general government debt has risen from 41.9 per cent of GDP in 1992 to an estimated 54.2 per cent of GDP in 1995 so that much of the leeway below the 60 per cent reference level has been used up. The overall net worth of the public sec tor has declined from 28 per cent of GDP to 14 per cent over the same period. The durability of borrowing at a high level raises ques tions about the sustainability of current policy towards public expenditure and taxation. One of the issues which this paper seeks to address is whether the existing combi nation of spending and receipts can be sustained, taking account of the composition of spending between current consumption and investment and receipts between taxa tion and asset sales. We suggest that there is a need for further tax increases or spending cuts of the order of 2 per cent of GDP to stabilise the public finances. The present government plans to reduce spending as a share of na tional income over the coming years and if implemented this would put the public finances onto a sound footing, assuming that the economy develops as we forecast. However, there is a worry that these plans are over ambi tious in some areas and harsh in others and hence may turn out to be difficult to implement. Therefore, it is more probable that a future government will be forced to raise taxes at some time if stability is to be achieved. In the next section of the paper we explain why the sustainability of fiscal policy is judged not by the size of the deficit but by the composition of spending and receipts and the evolution of the wider balance sheet of the public sector. We argue that it is necessary to look at an appropri ate measure of the current balance between spending and receipts which excludes interest payments and income from assets. In the following section we present historical information on the public finances, including an alterna tive classification, first presented in Pain, Young and Westaway (1993) which splits borrowing into a measure of the current primary balance, net capital spending and net income from assets. We report empirical evidence showing the determinants of the current primary balance over the post war period which indicates that this has been affected by the balance sheet position of the public sector and the electoral and economic cycles. We then go on to discuss the sustainability of present policy. A final section summarises the paper and offers some conclusions.

Optimal Monetary Policy

In this article we propose a policy framework for inflation targeting that contains elements of both optimal and simple rules. We use a simple feedback rule for the interest rate to look after monetary policy in the long run whilst using optimal control in the short run to determine appropriate responses to shocks. The composite policy is capable of substantial welfare improvements over using a simple rule alone whilst maintaining tractability. We see the use of such a framework together with a fully specified model as a feasible approach to practical policy design.

Using NiGEM in Uncertain Times: Introduction and Overview of NiGEM:

This paper introduces a special issue of the Review on how the National Institute Global Econometric Model (NiGEM) is being used to navigate uncertain times. NiGEM is the leading global macroeconomic model, used by both policy-makers and the private sector across the globe for economic forecasting, scenario building and stress testing. The paper summarises the main features of NiGEM and describes some standard model simulations to illustrate how the model responds to monetary, fiscal and technology shocks.

Commentary: The UK and the world liquidity crisis:

The world economy Over the last three months the state of the international economy has attracted considerable attention, and the changes in the world economy have been the main cause of the slight reduction in our predicted value for eco nomic growth in the UK next year. We therefore begin this commentary with discussion of the world situation, and then consider the position of the United Kingdom.