1. Fiscal Policy Evaluation points

2. Why is accurate data important?
1997 – new Labour govt introduced an Independent Monetary Policy Committee (MPC) for the BoE – why?
2010 – new ConDem govt introduce an independent Office for Budget Responsibility (OBR) – why?
which will have responsibility for assessing the public finances and the economy, including the generation of forecasts, and for assessing the public-sector balance sheets

3. Office for Budget Responsibility
The OBR will be headed by Sir Alan Budd, an economist who was a founder member of the Monetary Policy Committee (MPC) of the Bank of England.
Sir Alan will head a 3-member Budget Responsibility Committee (BRC) which will be supported by economists and public finance experts currently working in HM Treasury, but who in the longer-term will redeployed from the Treasury.
They will be supported by eight staff seconded from the Treasury.
But is this enough staff to do the job in 50 days?

4. Confidence and credibility - why is this important in economics?
Why is it important for economic data to be accurate?
What is this week’s inflation level?

5. CPI April 2010

6. If you were Mervyn King….
What would you write in your letter?

7. Mervyn’s reasons for Inflation…
The MPC's assessment is that that rise is largely accounted for by three factors:
first, the impact of higher oil prices, which on average in April were nearly 80% higher than at the beginning of 2009, pushing up on petrol price inflation;
second, the restoration at the beginning of January of the standard rate of VAT to 17 ½ %
and third the continuing effects on inflation of the sharp depreciation of sterling in
The MPC judges that together these factors more than account for the deviation of CPI inflation from target and that the temporary effects of these factors are masking the downward pressure on inflation from the substantial margin of spare capacity in the economy.

8. Confidence and credibility - why is this important in economics?
What would happen if this data was ‘inaccurate’?
What if CPI is wrong from 3.7%
What if RPI is wrong from 5.3%
What would happen if it was wrong by 1%?
What would happen if it was wrong by 2%?
How does this affect govt fine tuning policies…?

9. Is this really a problem?
Is this ‘new news’?
Is this really a problem?
See textbook p430!

10. Problems with data
Time lags – multiplier how big & how long. What will the capital spending be on? Long term capital projects…. Roads? Hospitals? Education? Compared to short term policies.
Black holes / residual error – how big is the ‘genuine’ deficit?
Inadequate knowledge – who really knows how the economy will behave? Classical, Keynesian, Monetarists?
Inadequate models – too many exogenous shocks that no one can predict!

11. Homework

12. Flat tax Read DR from textbook p417/8 Arguments for Flat Tax
Arguments against