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By David Robinson
     LONDON (MNI) - The Bank of England will be left walking a presentational
tightrope when it assesses the size of any boost to the economy from public
spending increases following the Dec. 12 election, but recent research suggests
the multiplier effects of fiscal stimulus may be low in current conditions.
     All major political parties are committed to higher spending, so BOE
officials, who seek to avoid commenting on fiscal policy, will need to make
assumptions on the fiscal multipliers - the ratio of change in output to the
change in discretionary government spending. The Bank has previously not
published anything in detail on these multipliers and the pressure will be on it
to once again stick to broad-brush assumptions to avoid being pulled into the
political morass.
     External studies have explored the idea that fiscal multipliers are not
constant but vary according to variables such as the business cycle, the level
of public debt and the monetary policy stance.
     On this basis the UK fiscal multipliers may, at present, not be that large.
     One paper on the UK by, among others, Giulia Sestieri, Deputy Head of the
Monetary Policy Division at the Bank of France, found that "government spending
multipliers vary over time and that most of the variation is cyclical:
multipliers for GDP are typically above one in recessions and below one in
expansions" and "that the impact of government spending shocks is limited in the
UK in non-recessionary periods."
     Research on OECD countries by former BOE economist Ryan Banerjee and
Fabrizio Zampolli, at the Bank for International Settlements, found that
"estimates of fiscal multipliers are generally below one across a variety of
states" with multipliers generally lower when the output gap was positive,
public debt was high and countries faced a current account deficit.
     --OUTPUT GAP
     The BOE's most recent assessment is that, following recent below trend
growth, a very slight negative UK output gap has opened up, of -0.25% of GDP,
but that this could soon turn positive. The country has high debt levels, a
permanent current account deficit and growth is still just positive, suggesting
that fiscal multipliers at present will not be as high as they could be.
     The BOE's extensive in-house economics staff can be relied on to keep up to
speed on external research but the Bank also has strong reasons not to publish
any material on state of the art fiscal research, as this would risk its being
perceived as judge and jury on fiscal policy.
     In its September minutes the BOE's Monetary Policy Committee seemed to
assume a fiscal multiplier of markedly below one when it stated that the
government's recently-announced stg13 billion increase in departmental spending
limits, equivalent to a little over 0.6% of GDP, could raise output by around
0.4% over its three-year forecast horizon.
     The Office for Budget Responsibility, the official fiscal forecaster, also
uses broad brush fiscal multipliers, assuming a multiple of one for capital
spending increases and just 0.3 for income tax changes.
     MPC members are free to form their own views on the plausibility of any
modelled assumptions of fiscal multipliers.
     In the MPC's November projection, despite the fiscal boost, the level of
GDP at the end of the forecast period was around 1% lower than in the preceding
August report, due largely to asset price movements and the weaker global
environment.
     The MPC's next meeting, ending Dec. 18 with an announcement Dec. 19, would
be too close to the election for it to fully factor in any fiscal changes into
its projections. Forecasts in the Jan. 30 Monetary Policy Report, however, may
be released after a new government has produced a budget.
     The governing Conservative Party, currently well ahead in the polls, has
adopted fiscal rules which would allow it to boost investment spending by an
additional 1% of GDP.
--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com
[TOPICS: M$B$$$,M$E$$$,MT$$$$,MX$$$$,M$$BE$,MFB$$$,MGB$$$]

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