A short-term fiscal Stimulus

Back in November I argued in the Fraser of Allander Institute's latest Economic Commentary that the sluggishness of the UK and Scottish recoveries meant there was still scope for some fiscal easing without damaging our fiscal credibility in the long-term. When pressed later by journalists on what specifically should be done I mentioned raising unemployment benefits and cuts in national insurance. The former because household in receipt of unemployment benefit would almost certainly go out and spend it quickly (Technical: the households have a high current marginal propensity to consume). The latter because it would inter alia reduce the marginal cost to firms of hiring additional labour.

The argument for increases in unemployment benefits was met with hostility in comments from Scottish business organisations and in some letters to newspapers from supporters of the UK government's current austerity policy.

Here is some supporting evidence from the Congressional Budget Office (CBO) of the United States in testimony to the Committee on the Budget of United States Senate on 15 November 2011. See chart:

The CBO conclude that

• Policies that would have the largest effects on output and employment per dollar of budgetary cost in 2012 and 2013 are ones that would reduce the marginal cost to businesses of adding employees or that would be targeted toward people who would be most likely to spend the additional income. Such policies include reducing employers' payroll taxes (especially if limited to firms that increase their payroll), increasing aid to the unemployed, and providing additional refundable tax credits in 2012 for lower- and middle-income households.
• Policies that would primarily affect businesses' cash flow but would have little impact on their marginal incentives to hire or invest would have only small effects. Such policies include reducing business income taxes and reducing tax rates on repatriated foreign earnings.

But the CBO warn that

If policymakers wanted to boost the economy in the near term while seeking to achieve long-term fiscal sustainability, a combination of policies would be required: changes in taxes and spending that would widen the deficit now but reduce it later in the decade.