Setting the Wrong Guidelines for Fiscal Policy

The initial mildly Keynesian fiscal policy applied to the 2008 financial crisis in the UK is outlined and the shifts in policy indicated. The focus of this article is on the use of the concept of structural budget deficit and potential output in the formulation of fiscal policy. It is argued that the structural budget deficit is a poorly formulated concept. Further, potential output has taken various meanings, but in the manner in which it is presently used should not be viewed as a desirable level of output nor as a constraint on the level of economic activity. The final section argues that the present government's plans to achieve a nearly balanced structural budget rests on highly optimistic assumptions on the levels of investment and net exports, and are unlikely to be achieved.