Measuring fiscal stance for the United Kingdom, 1920-1990

The purpose of this paper is twofold. First, it presents a very concise way of measuring fiscal stance. This procedure is based on the assumption that the ‘neutral change’ in the government budget can best be simulated with a long-term approximation of the underlying trend of total output. It is transparent and straight-forward, albeit to some extent necessarily arbitrary. Second, the procedure allows a long-term view on fiscal stance in the UK. It employs a consistent approach, which makes it possible to unify the discussions which have hitherto focussed on separate decades on the basis of measures of fiscal stance, which were difficult to compare. The results of the exercise show that government policies added to the total demand in the economy during the late 1930s. The impact was sustained over the years 1948-67, although the short-term impact of policies caused the stance of fiscal policy to fluctuate. After 1975 a gradual decline of public expenditure started, while revenues remained at level. During 1979-1990 the net contribution of the public budget to total demand has been negative in an economic sense. As far as governments attempted to smooth business cycles by fluctuating the stance of fiscal policy, their attempts do not seem to have been successful. The growth of GDP was subjected to business cycles throughout the period under observation. As far as the impact had some significance, it appeared to have prevented a major set-back in output growth in the 1930s. In contrast, it seems to have increased the shortfall in total demand in the 1980s.