A small bit of macro, post-election-post-mortem

So, UK voters opted for redoubled deficit reduction while we are still trapped at the zero bound, followed by a spurt of spending towards the end of the next Parliament.

I would have voted for the opposite, [although no-one was offering that to me].  Ie a splurge now, followed by a protracted period of deficit reduction and subsequent surpluses, when monetary policy could safely accommodate them.  It was depressing to watch the whole of the campaign go by without this basic idea getting much of an airing.

If the natural rate shock that the UK is facing proves to be shallow and temporary from here on, then this won’t be ideal, but it might not be disastrous either.  Or, regardless, if as the over-confident Bank of England say, their unconventional tools are strong and fast-acting enough to compensate, it won’t matter what the Conservatives decide to do.

Of course, since the 2010 Plan A was abandoned mid-course, despite it being explained (and described after its abandonment) as a ‘deficit-reduction-come-what-may’ plan, sensible observers would factor in a fair chance that 2015 Plan A will also be abandoned if it does not go well.  If it this comes to pass, we might hope that this time the demand-boost that would normally accompany abandonment would not be foregone by trying to pretend that the harsh medicine was continuing, as happened last time under the discipline of political priorities. (The priority being to make sure that the Coalition did not appear to have lost the argument).

Although we have single-party government again, this is only a superficial difference.  The Conservatives are a tense and fragile coalition.  And I would guess that there was every bit as much chance of wavering rebels tilting fiscal policy in the direction of easing, especially in those UKIP constituencies that are going to be hardest hit by cuts to spending and transfers.

 

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