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UK: Keynesian stimulus required

One subject that I will return to regularly and in some depth will  be the appropriate macro policy for the UK economy. During the global financial crisis I broadly favoured the government's policy of austerity. Now I think the pendulum has swung. The chancellor took the opportunity to fix the public finances when the economy was not doing too bad. The budget deficit fell from some 11% of GDP in 2010 to around 3.8% of GDP now. As a result we have fiscal space to ease I believe in these uncertain and potentially difficult times, so supplementing monetary easing, both the unplanned devaluation of the sterling pound as well as cutting short-term interest rates to zero (probably very soon) and some further quantitative easing. The cost of borrowing has shrunk. Key 10-year bond yields have fallen to 0.69% (with 1-year bonds at a ridiculously low 0.04%), meaning it costs virtually nothing to service the debt. So this is the time to allow the automatic stabilisers operate, to cut taxes and raise government investment.

What precisely should the government do? Well to boost productivity (a persistent UK weakness) and boost long-term growth prospects, we should spend on better infrastructure including roads, rail and airports, making final decisions on expanding Heathrow, on HS2 and CrossRail 2, and looking at  many other lower profile projects. Increasing housebuilding is necessary too, even if eventually there is better control of migration into the country. More vocational training schemes are important too. We must look also at how we can help to heal the wounds of a divided society, clearly exposed by the  Brexit vote. The cut in corporation tax to 15% from 20% would seem a good move too as we boost the attractiveness of this country, though one concern remains that doing this may annoy the EU, at a time we are negotiating with them.

*Patrick Dennis is a British Economist currently working with Oxford Economics. He has spent nearly 40 years working as an economist in the City of London and its environs. He served as Chief Economist at the Industrial Bank of Japan and was also  senior economist for both National Westminster Bank and Royal Bank of Scotland. He holds a postgraduate degree from Corpus Christi College, Oxford University.

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