Friday, May 01, 2009
What is the sustainable growth rate of the UK?
FT: ‘Goldilocks economy’ was unsustainable boom
Robert Chote, Director Institute for Fiscal Studies. - "Between 1998 and 2008, output in the economy was 3-4 per cent above its sustainable level, he estimated, in what he called “an alternative view of history”.
Posted by mountain goat @ 12:55 PM (567 views) Add Comment
3 Comments
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1. mountain goat said...
‘Goldilocks economy’ was unsustainable boom
By Chris Giles, Economics Editor
Published: April 30 2009 22:57 | Last updated: April 30 2009 22:57
The “goldilocks” economy under Gordon Brown as chancellor – neither too hot nor too cold – can now be seen as an unsustainable boom followed by a big bust, according to analysis by the Institute for Fiscal Studies.
Robert Chote, IFS director, found that the boom was only just shy of the Nigel Lawson boom of the 1980s and the Anthony Barber boom of the 1970s. His calculation used last week’s Budget forecasts and the government’s long-standing method of assessing booms and busts.
Between 1998 and 2008, output in the economy was 3-4 per cent above its sustainable level, he estimated, in what he called “an alternative view of history”.
This view, he said, would “cast a much less flattering light” on Mr Brown’s record as chancellor. “It would certainly suggest that he should have been running a much stronger fiscal position.”
The IFS analysis updated Financial Times estimates of the “output gap” after the pre-Budget report, when the Treasury changed its method of calculating the gap, which is defined as the difference between gross domestic product and the sustainable level of GDP.
Before last year, the Treasury believed that the sustainable growth rate was 3.5 per cent yearly in Labour’s first term and about 2.75 per cent after 2001. But once the economy started to decline sharply at the end of last year, officials decided that some of the lost output would be permanent because much of the credit-fuelled growth was unlikely to return.
In Depth
UK Budget 2009
However, instead of arguing that some of the previous growth had been unsustainable, they chose a view that painted a more flattering account of the Treasury’s ability to avoid boom and bust.
Officials inserted an alternative assumption that, for three years from mid-2007, the sustainable growth rate was only 1 per cent – and would revert back to 2.75 per cent in 2010.
If, instead, the economy could sustain only a roughly constant 2.6 per cent growth yearly from 1997, most of this decade would have been seen as a period of unsustainable boom combined with falling global prices, which stopped inflation rising too high.
Mr Chote said this view posed “much more awkward questions” about the goals of monetary policy.
“If the missing boom manifested itself in asset and credit markets – rather than those for labour, goods and services – then to do what we can to promote stability in the future the Bank will have to be given a rather more opaque and multi-faceted target to pursue than ... to date.”
Copyright The Financial Times Limited 2009
2. paul said...
“If the missing boom manifested itself in asset and credit markets – rather than those for labour, goods and services – then to do what we can to promote stability in the future the Bank will have to be given a rather more opaque and multi-faceted target to pursue than ... to date.”
Translation: "The Bank of England shouldn't have been chasing house prices"
3. contrails are not a conspiracy (formerly npnh) said...
Why does “success” have to be associated with “growth” anyway? Surely steady as she goes is OK?
Similarly at work it is no longer acceptable to “just be doing your job”. Instead you have to demonstrate how you are doing extra stuff not in your job description and constantly looking for ways to excel in other areas in order to qualify for pay rises that used to be applied equally across the grades.
There is only so much carrot one can eat!