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ANOTHER LOOK AT A SENSIBLE FISCAL POLICY FOR THE SHARP RISE IN GOVERNMENT DEBT

Published online by Cambridge University Press:  22 August 2023

Forrest Capie ,
Meyrick Chapman ,
Chris Marsh  and
Geoffrey Wood
Forrest Capie*
Affiliation:
Bayes Business School, City, University of London
Meyrick Chapman
Affiliation:
Hedge Analytics Ltd.
Chris Marsh
Affiliation:
Exante Data
Geoffrey Wood
Affiliation:
Bayes Business School, City, University of London, and University of Buckingham
*
Corresponding author: Forrest Capie; Email: f.h.capie@city.ac.uk
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Abstract

This paper weighs possible medium-term responsible policy choices to the extraordinary expansion of government spending in response to the COVID-19 outbreak. The paper is divided into two parts. In part 1 of the paper, we look at conventional debt sustainability and question whether conventional rules created during a period of high interest rates and high inflation remain relevant. Current and future conditions support a case for government debt/GDP to remain elevated compared to history, conditional upon limited state interference in the economy to allow appropriate allocation of capital and resources. In part 2, we consider the historical experience of the United Kingdom. History shows the country had several examples of rapid, large-scale expansion of government debt relative to the size of the economy. On each occasion, the elevated level of debt-to-GDP was later reduced by a combination of relatively benign factors, including commitment to low inflation and sound monetary system. This supported the financial probity of the UK government and allowed it to continue to borrow unimpeded.

Keywords

DebtgrowthInterest ratesWarE62H63N1
Type
Research Article
Information
National Institute Economic Review , Volume 263 , Spring 2023 , pp. 94 - 103
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of National Institute Economic Review

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