Medium-Term Prospects for the Public Finances

Ray Barrell and Simon Kirby

National Institute Economic Review, 2010, vol. 212, F60-F67

Abstract: The financial crisis and the recession it induced have wrought havoc with our understanding and decision-making on the medium-term fiscal position. The crisis will leave us with a higher debt stock and a lower level of sustainable output, and both of these will have implications for the optimal paths for spending and for taxes. If sustainable output has changed then spending plans need to be revised, even if there is no excessive accumulation of debt. If debt has been accumulated in excess of that seen as wise before the crisis, then a plan must be in place to raise taxes and reduce spending in order to return to (or towards) a desired level of debt, even if sustainable output has not been affected. In addition to adjustments in response to changes in trend output and in the debt stock, there may also be a need for an adjustment in response to any structural deficit that existed before the crisis broke.

Date: 2010
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