Menzie Chinn Thinks about the U.K.'s Double Dip: "If there was a country where the expansionary fiscal contraction scenario could play out, it would be there"

MC:

Econbrowser: Thinking about the Double Dip Recession in the UK: [T]he UK is in the first double dip recession since 1975, thanks to among other things the government’s contractionary fiscal policies. This recovery is in fact worse than that of the Great Depression.

Here are three other observations that might not be so obvious: (1) Growth has been lackluster ever since the election of the coalition government in May 2010; (2) growth under the program of austerity has compared poorly against the (admittedly insufficiently stimulative) fiscal policy framework in the US, and; (3) UK GDP growth has been lackluster even with the depreciated pound, which is interesting given that exchange rates can act as a shock absorber.

I found it notable that UK growth has been so weak ever since the implementation of the austerity program. In some ways, it’s "textbook"….

It's clear the contractionary fiscal policy has not attained the objectives sought. According the IMF's Article IV report from 2011, FY2009/10 structural budget balance, was -5.3%. The FY10/11 budget balance, under the new government, was -4.5%. The programmed (cyclically adjusted) balances in FY11/12, FY12/13, FY13/14 were -3.2%, -2.0%, and -0.6%, respectively (and into surplus in subsequent years!) according to the March 2011 budget. Most reasonable models would predict contraction and that's what we get.

Austerity in a (relatively) small, open economy is still not expansionary.

The UK economy is about one sixth the size of the US evaluated at current exchange rates. If there was a country where the expansionary fiscal contraction scenario could play out, it would be there…