Expansionary Fiscal Contraction in Action (or Not)

The recession in the UK is even worse than first reported.

expfisccontuk.gif
Figure 1: UK annualized q/q GDP growth (chained 2008), calculated as log differences. Dashed line at 2010Q2 (new coalition government). Source: UK ONS.
2012Q1 growth is revised down from -0.1% (quarterly rate) to -0.3%.

As I noted earlier [1], this should put (yet another) nail in the JEC-Republican proposition that cutting spending will necessarily result in an output boom. If it doesn’t happen in a relatively open, small economy, what would happen in a large, less open economy, stuck at the zero interest bound? [2]

This post originally appeared at Econbrowser and is posted with permission.

One Response to "Expansionary Fiscal Contraction in Action (or Not)"

  1. AndrewMGarland   May 25, 2012 at 12:12 am

    UK Total Government Spending 2008-2015
    . . . http://www.ukpublicspending.co.uk/spending_chart_

    UK GDP, Government Spending, Percentage

    Year . . . GDP £B . . . Govt . . . % GDP
    . . . . . . . . . . . . . . . . Spending
    2008 . . . 1448.4 . . . 575.7 . . . 39.7% . . . Actual
    2009 . . . 1395.9 . . . 621.5 . . . 44.5% . . . Actual
    2010 . . . 1453.6 . . . 660.6 . . . 45.4% . . . Actual
    2011 . . . 1526.5 . . . 683.4 . . . 44.8% . . . Actual

    2012 . . . 1602.8 . . . 703.4 . . . 43.9% . . . Guess
    2013 . . . 1693.7 . . . 722.2 . . . 42.6% . . . Guess
    2014 . . . 1789.0 . . . 740.3 . . . 41.4% . . . Guess
    2015 . . . 1889.1 . . . 760.5 . . . 40.3% . . . Guess

    2008 – 2011 UK government spending increased yearly. It increased dramatically in 2009 and hovered around 45% of GDP.

    Is there any austerity represented in this data? Government spending in 2009 increased by a huge 5% of GDP. This increased GDP in 2009, but why didn't it produce wonderful 1.5x to 4x absolute increases in GDP in the following years? It was supposed to be stimulative. Why would such small changes in later spending spending (as a percent of GDP) cause a double-dip recession?

    GDP seems to have increased/decreased only by the amount of increased/decreased government spending. That does not show a stimulus, just an accounting.

    You might propose that a dramatic increase in 2011 spending would have stopped a second recession, but it does not seem to me that "austerity" caused it in the first place.