UK net borrowing requirement [Image: Mainly Macro].

Suppose that in 2010 we had had a UK Chancellor who was seriously worried about market reaction to the deficit, but who was also concerned about the recovery. What might they have done?

First, the clever Rupert Harrison who used to advise George before that unfortunate accident had come up with quite a nifty fiscal rule that required hitting a target for the current budget in five years time. This had two advantages. First, austerity could be back loaded to give the recovery the best chance of taking off. Second, the rule did not include public investment. Now the chaps at the Treasury said that the multiplier from public investment was pretty high…

But both the guys at the Treasury, and Mr. King, might have said that postponing all the deficit reduction until after 2011 would not be credible… The Treasury people would have said that if the aim was to protect the recovery, tax rises – particular on the better off – would be preferable, because some of those would come out of savings rather than reduce demand.

There’s a lot more flesh to this in the full article on Mainly Macro but the parting comments are well worth repeating: “An austerity plan could have been devised which tried to protect the recovery as much as possible. In particular, public investment could have been kept high, but what actually happened was it was cut substantially. What we got were fiscal actions that seemed to completely ignore the fact that we were just emerging from an unprecedented recession. When interest rates are at the Zero Lower Bound that is bad policy making and it had large costs.”

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