The dividing line in recent economic trends came at the beginning of last year when a two-year phase of slow growth came to an end. Total output, which had risen at a rate of only 1½ per cent a year between the first quarter of 1981 and the fourth quarter of 1982, rose by 2½-3 per cent during 1983. This change of tempo coincided with an upturn in the world economy, but owed little to it initially. Exports followed rather than led a recovery which was based mainly on consumer spending, particularly on durables. Most of this spending was financed by borrowing, but the primary stimulus probably came from falling inflation.

The recovery which had started in the US and Canada around the beginning of 1983 had by the end of the year spread to all the other major countries (and probably most of the smaller ones also). From the second quarter onwards OECD countries' total real output was increasing at an annual rate of some 4-5 per cent.

There is much debate at present about trends in public expenditure. The recent Green Paper on the longer-term outlook for public spending describes how public expenditure has risen faster than GDP in the past and raises the question whether total public spending need grow at all, in real terms, in future although the growth of GDP is projected at over 2 per cent a year. This article is not intended to offer any normative comment on future policy for government spending. Its purpose is to describe some preliminary results of a study of the growth of government spending and its relationship to GDP in the United Kingdom; it also makes some comparisons, in rather broad terms, of the experience of this country with that of some other countries.

The behaviour of labour productivity (output per head) in recent years has received considerable comment. Growth rates in manufacturing of 5.7 per cent and 6.0 per cent in 1982 and 1983 have been interpreted by some as heralding a new era in industrial relations and technological innovation. One systematic analysis identifies an upward shift in productivity in 1980, followed by more normal behaviour thereafter (see Mendis and Muellbauer (1983), and also the article by John Muellbauer in the Financial Times, 20 April 1983). The improvement has taken place in most manufacturing industries, and remains however carefully we try to measure labour's input into production (National Institute Economic Review, no. 106, pp. 42-46).

The central purpose of this article is to provide measures of the effect of fiscal and monetary policy in the period 1979-82, using for the purpose information derived from simulations of two macroeconometric models of the British economy, those of HM Treasury and the National Institute of Economic and Social Research. The methodology employed is explained in detail in the next section, which is succeeded by a discussion of its implementation in the second section of the article. The principal results of the analysis are then set out in the third section of the article. The period under consideration has been marked by a severe recession, to which domestic economic policy has not been the only contributor; in the fourth section of the article we therefore consider the additional influence of world factors. In the fifth section we go on to consider an extension of the policy measures to take account of exchange rate policy. There is a final section of conclusions which assesses the contribution of government policy and the downturn in world trade to the shortfall of output below its trend value. An appendix provides additional technical detail whilst more complete tabulations of the results are available on request from the authors.