UK Economics Services
Highlights
How should the government fill the fiscal black hole?
Though the recession has wreaked significant damage on the public finances, most of the deficit is structural and will remain in place even as the economy recovers. Significant policy tightening will be required after the spring election, regardless of which party takes power. A political consensus has formed that cuts in public spending will form the bulk of the fiscal tightening and past experience suggests that this is the most effective method of reducing the deficit without unduly harming the wider recovery. But given the scale of the deficit, it is unlikely that tax increases can be avoided. Timing will be crucial - an overly abrupt fiscal tightening could cause the economy to relapse, but unnecessary delay in taking action would increase the risk of a credit downgrade and could require an even greater fiscal adjustment in the future.
18 January 2010
Why has unemployment not risen more in the recession?
The recession has resulted in the steepest fall in UK GDP since the 1930s yet the decline in employment has been surprisingly modest. This experience has been very different to that of the US where a less severe GDP fall has been met with much steeper cuts in employment and hours and a sharp rise - rather than a fall - in labour productivity. Part of the story is continued growth in public sector employment, but strong trends in profitability and a weak pound have also helped to mitigate the impact on private sector employment. The analysis is complicated by the possibility of measurement errors. The severity of GDP declines in past recessions has often been revised down in subsequent estimates and there is a possibility that the LFS exaggerates the current level of employment. If official data are correct then there will have to be a period of flat employment to allow labour productivity to return to trend. If the data are exaggerating the extent of the fall in labour productivity, the prospects for employment growth look much better.
18 January 2010
UK GDP per capita lower than at time of last General Election
The recession means that UK GDP per capita – a key measure of economic prosperity and living standards - is lower in real terms now than at the time of the last General Election in 2005. UK GDP per capita is estimated to average £22,700 in 2009, down from £23,000 in 2005 (when measured at today’s prices to adjust for the effects of inflation). The decline in GDP per capita during this parliament contrasts markedly with the strong rises seen through Labour’s first two terms in office. The fall in UK GDP per capita combined with the decline in sterling means that the UK has seen an even sharper decline in its relative living standards compared with other major economies.
30 December 2009