Fiscal and Macroeconomic Policy

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The Importance of Macroeconomic Frameworks for Economic Stability Dave Ramsden 11 January 2006


Why does stability matter?Higher living standards Higher economic growth via Better resource allocation Decisions taken for the long-term Clearer relative price signals


UK has moved from one of the least stable to the most stable economy in the G7 and OECD


GDP and inflation volatility in the G7 – 1997-2005


GDP growth has risen as GDP growth volatility has fallen


Both inflation and inflation volatility have fallen


Why has UK stability improved?Key lesson from pre-1997 is the importance of having credible macroeconomic frameworks. Before 1997, macroeconomic policy was characterised by: inappropriate objectives; poorly specified objectives; a failure to look forward; unclear and inconsistent roles and responsibilities; and Politicisation of monetary policy decisions.


Principles of UK fiscal framework· Transparency in the setting of fiscal policy objectives · Stability in the fiscal policy process and in the way fiscal policy impacts on the economy; · Responsibility in the management of the public finances; · Efficiency in the design and implementation of fiscal policy and in managing both sides of the public sector balance sheet; and ·  Fairness, including between generations.


Fiscal rulesGolden rule: over the economic cycle, the Government will borrow only to invest and not to fund current spending Sustainable investment rule: public sector net debt as a % of GDP will be held over the economic cycle at a stable and prudent level (40%)


Performance of fiscal framework - meeting the golden rule


Performance of fiscal framework – net debt


Principles of UK monetary policy framework· Clear and precise objectives (a 2% annual rise in CPI inflation) · Full operational independence for the Bank of England’s Monetary Policy Committee (MPC) Openness, transparency and accountability · Credibility and flexibility


Performance of monetary policy framework


SummaryImportant to get the principles right in macroeconomic policy frameworks. Precise form of rules differs between countries according to national circumstances Credibility is achieved by having rules underpinned by the right objectives and ensuring that the rules are met Credibility ensures that macroeconomic frameworks play a full role in contributing to stability.


Role of GES and HMT economistsMacro stability also helps allocate resources within government GES - 900 economists working in 32 departments 100+ economists in HM Treasury – increasing proportion looking beyond macro policy. Analyse evidence to inform policy Advise on choices & alternatives Make a difference on important issues


Role of OECD and EUEconomies of scale Learning from the experience of other countries OECD pioneers of micro peer review EU peer review, Lisbon Strategy

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Last Updated: 8th March 2018

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