A big boost

Yesterday's Half Year Economic and Fiscal Update, the 'HYEFU', has got well picked over - except from one important perspective: what's the overall stance of fiscal policy? Is it boosting or braking GDP growth?

The answer to that question is given by the 'fiscal impulse'. If you're not a fiscal policy wonk, the fiscal impulse is the difference between one year's fiscal balance (surplus or deficit) and the next year's, when the balances have been adjusted for the impact of the business cycle. When you've taken out those cyclical effects (eg a strong economy boosting the tax take) what's left is the impact of changes to fiscal policy. If the (cyclically adjusted) deficit is getting larger, for example, fiscal policy is becoming more stimulatory. If a surplus gets bigger, policy is becoming more contractionary.

Here are the HYEFU estimates of the impulse. For the (June) 2019 year, there's a stonking great positive fiscal boost to GDP, of the order of 2% of GDP, followed by an extended period of mildly contractionary fiscal policy.

You might well wonder, given that the economy grew by a roughly-on-trend 2.7% in the year to June 2018, why there's a thumping great boost from fiscal policy underway. And the answer is, it's an accident. Here's what was intended back on Budget day in May, compared with what's actually happened.

The government meant to give the economy a decent kick along from fiscal policy in the year to June '18: it never happened. Planned expenditure didn't go to schedule: "lower-than-forecast expenditure in 2017/18 has resulted in expenditure now in 2018/19 that was previously expected in 2017/18 driving up the impulse in this year" (from p15 of the HYEFU 'Additional Information' document).

Why? Who knows. I'd guess a combo of institutional inertia, and capacity constraints in areas like infrastructure and housing. It might be useful if someone in Treasury had a decent look: at some point we may well want to turn on the fiscal taps in a hurry, and it'll be no good if too little is 'shovel ready', as the jargon goes.

As it happens, moving the fiscal boost from 2017-18 to 2018-19 may not be a bad thing. It's still an anomalously pro-cyclical fiscal stance in an economy that doesn't need it, but on the other hand it does provide a hefty dollop of cyclical insurance against the risks lurking in the global economy (well laid out in the 'Risks to the Economic Outlook' section of the HYEFU).

Hopefully this fiscal impulse analysis will still be possible in the future. The HYEFU said (p32) that "The Treasury is currently reviewing these indicators [the cyclically adjusted fiscal balances, and the fiscal impulse] to ensure they remain useful to users and fit for purpose. Any changes to these indicators will be signalled prior to their publication". I hope that's not code for "we always knew these things were down the by-guess-and-by-God end" - as they are - "and we're not going to run with them any more". Something half-way towards an answer still trumps no answers at all.

More positively, there was a big step up in the quality of information provided on the government's capital spending plans. In the past you could go cross-eyed trying to find how much of the spend was opex and how much capex, where the capex spend was going, and whether it was enough to add to the national stock of infrastructure (you need to spend quite a lot just to keep depreciation at bay). That's hugely improved: the 'Core Crown Capital Spending' bit starting on p33 is excellent, and I particularly liked the clear explanation of the 'Multi-year capital envelope'. And in the bowels of Treasury is someone who managed to explain (on p30) the 'top-down' adjustment in Plain English. Give that person a chocolate fish.