Or, still no expansionary fiscal contraction in the UK (surprise!)
Figure 1: Real GDP growth SAAR (blue line, left scale), and log real GDP, rescaled to 2010Q2=0 (red line, right scale). Dashed line at advent of coalition government. Source: ONS 2012Q2 preliminary release.
Directors considered that deeper budget-neutral reallocations could also support recovery, including greater investment spending funded by property tax reform or spending cuts on items with low multipliers. They emphasized that automatic stabilizers should continue to operate freely, and underscored the need for shielding the poorest from the impact of consolidation.
Looking ahead, Directors commended the authorities for their strong commitment to achieve fiscal sustainability over the medium term. Many Directors supported the authorities’ prudent approach toward further fiscal easing, emphasizing the importance of not undermining fiscal sustainability and hard-won credibility, and noting the potential negative feedback loops between public finances and the financial sector. Many Directors also noted the difficulty of setting a specific timetable for potential future fiscal policy actions in the current uncertain environment. However, a number of other Directors considered that fiscal consolidation should not be accelerated as planned if growth does not build momentum even after further monetary and credit easing measures, noting that persistent weak growth that hinders achievement of fiscal targets might also pose risks to credibility. These Directors noted that any adjustment to the path of consolidation should be in the context of a multi-year plan and ideally accompanied by deeper long-run entitlement reform to help preserve credibility.
In other words, don’t implement rapid short term fiscal consolidation (think “fiscal cliff”  ) which will be self-defeating. Rather think about maintaining stimulus while building in a multi-year fiscal consolidation (In the US that requires tackling the real problems of low tax revenue as well as entitlement spending.)
The entire Article IV report is here; the staff appraisal starts at page 45. Paragraphs 66 and 69-70 are of particular note.
(Buried in there is a plea for use of a balanced budget multiplier — discussion by Simon Wren-Lewis here).
For those needing a good laugh in grim times, re-read this gem.
This post originally appeared at Econbrowser and is posted with permission.