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Medium-Term Prospects for the Public Finances

Published online by Cambridge University Press:  26 March 2020

Ray Barrell  and
Simon Kirby
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Extract

The financial crisis and the recession it induced have wrought havoc with our understanding and decision-making on the medium-term fiscal position. The crisis will leave us with a higher debt stock and a lower level of sustainable output, and both of these will have implications for the optimal paths for spending and for taxes. If sustainable output has changed then spending plans need to be revised, even if there is no excessive accumulation of debt. If debt has been accumulated in excess of that seen as wise before the crisis, then a plan must be in place to raise taxes and reduce spending in order to return to (or towards) a desired level of debt, even if sustainable output has not been affected. In addition to adjustments in response to changes in trend output and in the debt stock, there may also be a need for an adjustment in response to any structural deficit that existed before the crisis broke.

Type
The UK Economy
Information
National Institute Economic Review , Volume 212 , April 2010 , pp. F60 - F67
Copyright
Copyright © 2010 National Institute of Economic and Social Research

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References

Barrell, R., Hurst, I. and Kirby, S. (2009), ‘How to pay for the crisis or macroeconomic implications of pension reform’, NIESR Discussion paper no. 333.Google Scholar
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