Home > Fiscal Policy, Monetary Policy > What was the Fiscal Multiplier in 2008?

What was the Fiscal Multiplier in 2008?

Martin Wolf adds his voice to that of those ignoring monetary policy and calling for a splurge of public sector investment spending as the cure-all for demand deficiency:

Yet if not now, when? As Jonathan Portes, director of the National Institute of Economic and Social Research, argues in a recent blog post: “With long-term government borrowing as cheap as in living memory, with unemployed workers and plenty of spare capacity, and with the UK suffering from both creaking infrastructure and a chronic lack of housing supply, now is the time for government to borrow and invest. This is not just basic macro-economics, it is common sense.”

Jonathan Portes had said on investment:

Meanwhile, public sector net investment – spending on building roads, schools and hospitals – has been cut by about half over the last three years, and will be cut even further over the next two. Hardly surprising that the construction sector has been a heavy drag on output and jobs recently.

The answer to “Yet if not now, when?” is pretty simple.   We did it already.   Public sector net investment went from £26bn in 2007 to £38bn in 2008, then £52bn in 2010.

UK Public Sector Net Investment

UK Public Sector Net Investment (ex Financial Interventions).  Source: ONS Series JW2Z

The capital spending plans laid out in Alastair Darling’s budgets always had PSNI returning to more “normal” levels, with his March 2010 budget cutting from £40bn in 2010-11 to £29bn in 2011-12 and falling even in nominal terms beyond that.  (Yes, that graph is in nominal terms – presented as a proportion of NGDP it does not paint a different picture.  Deflating using the GDP deflator is probably not the best way to show “real” capital spending, in any case.)

Portes, of course, only presents the post-2008 view of that data, carefully framing the debate as a “slashing” of PSNI.  This seems somewhat disingenuous.  Must all fiscal “stimulus” in fact be a permanent increase in the level of government expenditure?  Is that the argument now?

And what was the fiscal multiplier when the government did engage in that massive “splurge” of capital spending?  Oh, that’s right – it coincided almost exactly with the biggest crash in nominal GDP since the 1930s.

UK Public Sector Net Investment vs NGDP Growth Rates

UK Public Sector Net Investment vs NGDP, Annual Growth Rates.  ONS Series JW2Z, YBHA

Naturally, we will be left with the argument that of course things are different now because of the “zero lower bound” on monetary policy, based on the bizarre proposition that it becomes impossible to raise NGDP (or inflation, or whatever) when interest rates get near 0% – or because monetary policy only works through bank lending or similar gibberish.

And those who continue to ignore monetary policy are blind to the fact that our monetary policy makers are currently actively trying to disinflate, that they see AD growth as “about right” – or perhaps even “too fast” – as dictated by the government’s own inflation target.

To be clear, I have nothing in particular against the government doing capital spending.  Maybe it really is “common sense”, though I doubt the Pembury road will ever get priority over the expensive white elephants.   But it is insane to pretend we should try to boost AD using fiscal policy whilst holding the inflation target in place.

At least Adam Posen has returned from the dark side.

  1. May 18, 2012 at 15:18

    Great post: a graph worth a thousand words :)

  2. May 18, 2012 at 15:29

    Thanks Lorenzo.

  3. Luke
    May 18, 2012 at 17:28

    The 2007-9 investment splurge – what was that on? Was it schools/roads/hospitals or banks?

    If it was banks, what was going on with underlying capital expenditure ? (not sure if there is such a thing, but I hope you can see what I’m asking.)

  4. May 18, 2012 at 19:44

    Luke, the series used there is specifically “ex” financial interventions, so excludes capital put into (or investments by) the banking sector.

    I had a look at the 2007/9 budgets, the increase looks spread quite widely. The biggest spenders of “Capital DEL” in 2009-10 were

    Defence £9.1bn
    CLG Communites £8.8bn – I presume this is “affordable” housing.
    Transport £8.3bn
    Education £7.2bn
    Health £5.6bn

    Rather a lot of defence spending, kind of sick that counts as “capital”.

    • Luke
      May 19, 2012 at 10:28

      I now see the ex financial bit in the original. Sorry. Still leaves the counter factual if they hadn’t, and the question of using low rates while you can, but I see your point.

      I read that John Kay article btw and I know Pembury. Maybe you and he should found the Society for the Promotion of Worthy but Dull Infrastructure.

  5. May 19, 2012 at 22:34

    “Rather a lot of defence spending, kind of sick that counts as “capital”.”


    What is the long run average? Say going back to the late 1970s. My folk history tells me that the Tories underinvested in the late 80s, early 90s and Labour’s spurge was to offset this.

    Similarly, some of New Labour’s poor productivity performance in the health sector is because they were elected to raise nurses’ pay, to reduce productivity.

    Where’s the data.

    PS I have frequently emphasised the importance of the incredibly dull in economics, like the pembury road ( but also Housing, FIRE, Wholesale, Retail) a teeny, tiny improvement in productivity massively increases wellbeing because they’re such dull but big sectors, a lot of the TFP growth in the 1920s/30s was based on productivity improvements in the boring. I wish there were more emphasis on the mundane.

  6. May 20, 2012 at 13:50

    Great comment. Yeah, my folk history would expect the same, and I don’t know the data. A major complication when looking at the long run is that there were so many sectors drawing on public sector capital, even in much of the 1980’s, before privatisation. It is hard to believe that BA was not privatised until 1987.

    Also won’t PFI skew the stats? I presume the ONS series on PSNI excludes capital spending via PFI because the private sector owns the capital and rents it to the state. Not checked that either, though.

  1. June 15, 2012 at 20:16
  2. October 26, 2012 at 07:02

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