Project in Macroeconomics for Public Policy
In February 2010, just before the May General election, 20 economists wrote a letter stating: “in order to be credible, the government’s goal should be to eliminate the structural current Budget deficit over the course of a parliament, and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-2011 fiscal year.” The newly appointed Chancellor, Osborne, hailed their letter as a “really significant moment in the economic debate”. Shortly after the current UK government came into power in 2010, the Treasury predicted that GDP would rise by approximately 2.5% in 2012 and 2.7% in 2013. However, GDP increased by only 0.4% in 2012 and started to recover only in 2013, almost 5 years after the financial crisis. Moreover, the impact of deficit reduction measures from the Government on the public sector debt has been widely questioned.
In the light of the data and the economic debate, provide a report to the Chancellor to explain
1. Why growth is now lower than previously expected.
2. Given weaker than expected growth and heavy borrowing, what would your advice be to the Chancellor on policies to promote growth?
3. Would your recommendations be different if you were advising the Greek, Italian or French governments?
In assessing your projects, the marker will be looking for:
1. Evidence of understanding the economic principles, concepts, theories and the policy issues.
2. Addressing adequately all elements required by the question.
3. Degree of analysis and clarity of arguments.
4. Appropriate use of diagrams when necessary.
5. Appropriate style and presentation.
Style. A good project is likely to have the following (as a guide)
1. Executive summary: roughly one page, set out as bullet points. Should set out:
– the key questions
– your conclusions/recommendations.
– Doesn’t need necessarily the methodology.
– Remember that the policy maker/public may not read beyond this, so it is important to get this right. Have a look at Executive Summaries from existing government reports.
2. Introduction: this sets out the main issues and approaches to be adopted.
3. The structure of the question gives you a guide to what might be the next three sections (the main body of the report).
Content – Question 1. This section is primarily empirical.
This is where you need to provide data and graphs.
You are asked why growth (GDP) was lower than expected:
• You need to go back to the Treasury predictions for the economy when the Coalition came to power, look at GDP (and its components) then…..
• Compare them with latest predictions and outturns (available on Treasury). What did it happen? Which components are lower?
• Also look at changes in public sector borrowing figures. You can speculate WHY the components are different but this is primarily about presenting the data and so is primarily DESCRIPTIVE rather than ANALYTICAL.
• You usually get more marks for analysis than description. 40% is generous here as it is the first project.
Content – Question 2. This gets to the heart of the issue. There is no ready answer, but you have to weigh up the issues.
The key point is the relationship between growth and debt reduction. Should we delay the government’s debt reduction plan in order to stimulate the economy through fiscal policy, bearing in mind that the deficit may increase anyway because of weaker than expected growth?
You have to show you understand the different schools of thought, what they suggest about the roles of fiscal policy and the implications for policy.
The hard part is to demonstrate sufficient analytical rigour (don’t waffle), but at the same time write in a style that policy makers will understand.
To be able to do this, you need to read widely. You cannot do this properly without understanding, in depth, the issues yourself.
See how the Treasury, IMF and World Bank write for example. Look at the Krugman article.
You are not trying to be evangelical, but present the arguments fairly .
You do need to produce policy recommendations. But this section must be based on the evidence rather than your personal preferences. This is evidence-based policy. For instance, if you want to recommend more PE, what type and why?
Content – Question 3.
• This part is really about differences between countries:
– Their debt conditions– you can get data from IMF, OECD or World Bank web sites;
– Their monetary policy frameworks.
• This affects the credibility of policies and the interest rates that will have to be paid by different governments at different debt levels.