Counting on fiscal policy to beat the UK downturn

London

THE UK authorities are right, after the referendum decision to leave the European Union, to take action to counter the immediate downturn. The Bank of England monetary easing announced on Aug 4 will buy time until fiscal measures can be enacted.

Since the long-term fiscal outlook is poor, the government must find ways of temporarily expanding the budget deficit with a return that will more than meet the very low extra interest rate costs. An immediate near-term concern is that the effect of a weaker sterling in boosting activity through higher exports is likely to be considerably less than anticipated.