Macroeconomics Case Study

Gordon Brown’s Fiscal Management

OR

Abstract: In the UK, the Chancellor of the Exchequer is considered the driver of the economic engine. Gordon Brown was appointed as the Chancellor in 1997 and was expected to become the longest serving in office. During his 7 years in office, Brown was successful in putting an end to the ‘Boom’ and ‘Bust’ cycle of UK’s economy. The framework through which the government implemented fiscal policy was set out in the Code of Fiscal Stability, which became an act of law through the 1998 Finance Bill. By adhering to the two rules (Golden Rule and the Investment Rule) of the fiscal code, Brown believed that he had achieved the macroeconomic policy objectives of high employment, low inflation, growth and balance of payments/trade equilibrium.

The case study helps analyse the two fiscal policy instruments of taxation and government spending. The case also helps in understanding concepts like, Laffer curve, public debt, automatic stabilisers and crowding out effect.

Pedagogical Objectives:

• To understand the importance of fiscal policy and its two instruments of taxation and government spending
• To study how automatic stabilisers stabilise the economy
• To debate whether higher government spending as proposed by Keynes is beneficial for the economy or not.

Keywords : Gordon Brown's fiscal management; Chancellor, exchequer, treasury; British economy, budget; Kenneth Clarke; Prudence, prosperity; The Code of Fiscal Stability; Golden rule, sustainable investment rule; Bank of England; Inflation, interest rates, unemployment