Thank you all those that commented on this paper, which was pulled together by a small group of economists and published below by Prof. Victoria Chick and myself, on 6th June, 2010.
The comments were on the whole supportive. However, one commenter, Mark Porthouse, asked why “our conclusion (namely that public ‘expenditure creates its own income’) – did not work over the period 2003-2009?” As Mark notes “an increase in public expenditure” over this period leads “counter to the conclusion of your paper” to ” an increase in public debt (…. except for 2005 where we see a 1% point decrease in public debt – but Mark notes that this is the year with only the slimmest increase in public expenditure).”
My personal response to this is as follows: first, the government in 2003 was spending to prevent the economy spiralling deeper into recession, after the collapse and bursting of the dot-com bubble in 2001. Second, much of UK government spending was not well aimed, and instead of acting as a stimulus went into non-productive expenditure on quangos, the PFI etc. We are clear that the fiscal stimulus must be aimed at productive expenditure. Finally, there was and still is, the evolution of a massive industry in tax evasion. This coincided with the expansion of the private finance sector, where it is relatively easy to evade taxes.
So, as we argued in the paper, the impact of a fiscal stimulus must be considered within the “wider considerations of financial architecture and monetary policy.”
These factors combined made it difficult for government spending to ‘create its own income’ over the period 2003-9.