On Dec 9, 2011, at 8:55 AM, James Heartfield wrote:
> Since UK government expenditure *increased* in the 2010/2011 year (from sterling 669 to 691 billion), a decrease in government expenditure is not a very good explanation for the poor performance of the UK economy.
Gov expenditure can increase "passively," because recession increases spending on income support and such, or actively, because of policy changes. What matters is the underlying structural shift - what the budget would look like at something like full employment. That's the standard way of measuring fiscal policy - changes in the cyclically adjusted balance. By that measure, the OECD estimates that British fiscal policy is in an "ambitious consolidation" mode of just over 1% of GDP a year for several years.
Also, business investment is weak because managers expect the economy to suck for a long time - in no small part because of the ambitious fiscal consolidation. Cameron et al thought that austerity would spark investment via what Christina Romer calls the confidence fairy, but it's (unsurprisingly) done just the opposite.
Also also, an increase of 1% in government expenditure when inflation is around 5% (and why is inflation that high when the economy is falling apart?) is a real decrease.