A Fiscal Stimulus Package for the UK?

As the UK economic downturn accelerates, the government is trying to devise a policy response to slow and eventually reverse the contraction. The Monetary Policy Committee has made a contribution by cutting interest rates drastically, sending the sterling exchange rate to an all time low against the euro. Many commentators are now also advocating fiscal policy action in the form of tax cuts or higher expenditure. This raises three questions. First, can the UK afford a fiscal stimulus, given that the budget deficit is already 3 per cent of GDP? Second, would a fiscal stimulus be effective? Third, how should any such stimulus should be designed? Is a tax cut better than a boost in expenditure? If so, which taxes should be cut? This note addresses these questions, drawing on recent contributions from academic research.