MacroPolicy Space Models: How is Debt Controlled in Great Britain?

In a prior post (Is Britain Heading for Another Debt crisis?), I found that the overall Debt controller (DEBT1 = DEBT-GDP) is stable and will return to balance after a Debt Crisis (Debt Shock). A recent article in the Observer (here) describes the process by which the UK Current Budget was formulated. Aside from all the chaos, it seems that there were three options facing the government: (1) Stimulated Growth to reduce debt (shock DEBT1=(DEBT-GDP), (2) Decrease Government Expenditure to reduce debt (DEBT2=(GDP-G) and (3) Increase Taxes (DEBT3=Q+G-TAX). In this post, I explore options #2 and #3.

Either decreasing Government Expenditure or Increasing Taxes would reduce DEBT but not by very much.

In terms of mu UK_DEBT model, options #2 and #3 involve negative shocks to the two DEBT components (DEBT2 and DEBT3) on the DEBT1 controller. The results are presented in the graphic at the beginning of this post. Negative shocks would decrease DEBT1 in less than a 0.50 standard deviation and would have about three years to reach full effect.

The Business-as-Usual (BAU) Model is not the best model, but it seems to describe how the government is reacting to the budgetary process. The best model for explaining DEBT1 is the World Input Model see path AIC statistics below) but the EU Input model (returning to the EU) also was a good model and was briefly discussed (and rejected) during the Budget formulation process.

One way to explain all the handwringing over the UK Budget is that it is fallout from Brexit(the UK Leaving the EU). The EU has rules about Debt that are always in the background on budget discussions. The UK is now going it alone and has only itself to blame for budget chaos.

Notes

Google AI

More Background

Blog Roll: The United Kingdom (1950-2000+)
Boiler Plate For information on data sources, how the models were constructed and general Historial Controllers.

Handwringing: