Economic Models - Convex Optimization

Topic 1
The Advantages of Fiscal Leadership in an
Economy with Independent Monetary Policies
Andrew Hughes Hallet
James Mason University, USA
1. Introduction
In January 2006, Gordon Brown (as Britain’s finance minister) was widely
criticized by the European Commission and other policy makers for running
fiscal policies, which they considered to be too loose and irresponsible. The
UK fiscal deficit had breached the 3% of GDP that is considered to be safe.
To make its point, the European Commission initiated an “excessive deficit”
procedure against the UK government, claiming that its fiscal policies constituted
a danger for the good performance of the UK economy and its
neighbors, if these deficits were not contained and reversed. Yet the United
Kingdom, alone among its European partners, allows fiscal policy to lead in
order to achieve certain social expenditure and medium-term output objectives
and a degree of co-ordination with the monetary policies designed to
reach a certain inflation target. And the economic performance has been
no worse, and may have been better than elsewhere in the Eurozone. Was
Gordon Brown’s strategy so mistaken after all?
The British fiscal policy has changed radically since the days when it
tried to micro-manage all of the aggregate demand with an accommodating
monetary policy in the 1960s and 1970s; and again during the 1980s, it
was designed to strengthen the economy’s supply-side responses, while the
monetary policies were intended to secure lower inflation.
The 1990s saw a return to more activist fiscal policies — but policies
designed strictly in combination with an equally active monetary policy
based on inflation targeting and an independent Bank of England. They are
set, in the main, to gain a series of medium- to long-term objectives — low
debt, the provision of public services and investment, social equality, and
economic efficiency. The income stabilizing aspects of the fiscal policy
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