The Institute for Fiscal Studies has reported on the government's proposals for student finance. Its findings cast some useful light on a debate that has been dominated by political spin. An important conclusion is that 'graduates from the poorest 30% of households would (under the government's proposals) pay back less than under Lord Browne's proposed system, but more than under the current system'. Many politicians would have you believe otherwise.

Browne's proposals, which involved a 'soft' cap on tuition fees at £6000, with universities being allowed to raise fees above that level while being subjected to a steeply rising tax, have been replaced by a 'two cap' system - where the cap is either £6000 or £9000 conditional on widening participation. Both Browne and government proposals involve a loan for tuition fees and maintenance that is repaid once the student graduates and is earning £21000 or more per year. Concessions made by the government include the annual uprating of this £21000 figure, and tuition fee discounts to students from the poorest families.

The media has portrayed this as a three-fold increase in tuition fees, indicating an expectation that many universities will pitch their fees at or near the higher cap. Indeed, it is quite possible that, by introducing the higher cap, the government will already have encouraged some institutions to set fees higher than they would otherwise have chosen. This would appear to be good for neither students not public finances, and appears to have been driven by a political need to retain a cap of some sort. Yet surely it is almost inevitable that the cap will go some day, and Browne's suggestion of protecting students and the taxpayer by imposing taxes on universities that charge high tuition fees was eminently sensible. In this respect, politics seems to have trumped common sense.

The universities, meanwhile, will suffer severe cuts to their teaching budgets from the coming tax year (which starts before the end of the current academic year), and will - if the legislation goes through - be able to charge higher tuition fees only from academic year 2012-13. They will face a more robust competitive environment, and will need to innovate rapidly - and constantly - if they are to prosper. These are interesting times indeed in higher education.

'Nudge' is the title of an influential book written a couple of years ago by Richard Thaler and Cass Sunstein. The thesis of the book is that small actions by government can be used to trigger large changes in behaviour amongst the population at large - government can 'nudge' people in a particular direction. The idea comes from the insights of behavioural economists who have combined research results from the disciplines of psychology and economics.

Nudge is now influential in policy circles. Indeed the new white paper on health policy, 'Healthy Lives, Healthy People', contains many ideas based on nudge. It talks of the need to harness 'the latest insights from behavioural science, and emphasises that 'top down inititiatives and lectures from central government about the risks are not the answer' to health issues.

Good. But let us hope that the solutions will be based on research, and that nudge is not used as an excuse for doing (and spending) too little when more needs to be done.

The Office for Budget Responsibility (OBR) has raised its forecast for growth in 2010 to 1.8%. This is in response to the higher than expected figure for third quarter growth. At the same time, the OBR's forecast for growth in 2011 has been cut - from 2.3% to 2.1% - following the VAT hike (from 17.5% to 20% in January of next year) and the planned cuts in government expenditure.

The outlook for the world economy remains very uncertain, with recent events surrounding the Irish economy merely serving to highlight the continued fragility of the financial sector. Weakness in the UK's main export markets continues to suggest that the risks remain on the downside. If the economy fares as well as the OBR expects in 2011, I would be pleasantly surprised; given the severity of the government's austerity measures, and the imposition of similar measures elsewhere, a growth rate of one point something seems to me to be more likely.

The government has launched an initiative to create an index of happiness. Prime Minister David Cameron has argued that purely economic measures of prosperity, such as Gross Domestic Product, provide too narrow a metric of our wellbeing. No doubt he is right.

Composite measures of wellbeing are not a new thing. The United Nations has calculated a Human Development Index which, since 1990, has evaluated wellbeing in terms of people's educational attainment, life expectancy and income. The UK comes 26th in this ranking.

But what about happiness? A lot of recent work on happiness uses standard survey questions such as this: 'All things considered, how satisfied are you with life as a whole these days?' Respondents give a response, usually on a 5 point scale. The results correlate strongly with more objective measures of average happiness across countries - like suicide rates, addiction rates and so on. So perhaps there is something in this idea of a happiness index.

We know that stable familes, good health, active leisure time, high levels of employment, a relatively equal distribution of income, freedom and democracy all positively influence happiness. If these insights lead to the adoption of policies that are family friendly, that are health enhancing, that encourage active leisure and so on, then that is all to the good.

So far, so good. But there is an inconvenient paradox lying in wait. Much of the work that has been done on happiness indicates that happiness has not risen over time - even though we are now much richer than we were in the past. However, we also know that our happiness is determined largely by a comparison of our own income with that of other people. So if we see other countries getting richer while our own does not, we become less happy.

Like it or not, the question of economic prosperity will always come to the surface.

There is the deficit, and there is the debt. The deficit is a flow (like water flowing into a bath) - and it only make sense to talk of a flow as a measure of volume per period. The deficit tells us how much is being added to the debt per year. The debt, on the other hand, is a stock (like the amount of water that is actually in the bath). We pay interest on the national debt, and if the national debt rises too high we squander too much of our resource on these interest payments.

Clearly the flow and the stock are related. Keep the tap on too long and the tub overflows. The deficit does need to be reduced. But this chart, published by the Financial Times, is useful in putting things in context.

Relative to many other countries, the UK started out from a good place. Its policy response to the recession was aggressive (and, given the economy's reliance on financial services, it needed to be). We are left with a high deficit that needs to be cut. But the national debt remains in a place which gives the government some discretion (not much, but some) about how fast it should go in making the cuts.

Output growth in the third quarter of this year, at 0.8%, was faster than many commentators expected. This is good news, clearly.

It is unlikely, however, that such a rate of growth could be sustained into the future - even in the absence of tough government budget cuts. While the latest data give some encouragement that the economy is stronger than we thought, the prospects for continued growth over the next couple of years remain very modest.

A few months ago, I reported the results of a simple forecasting model that I tried out on UK data, looking ahead over the next year or so. It's time for an update. There is good news and bad news: the model is no longer predicting a nosedive for late 2011. However it does predict extremely sluggish growth, barely above zero in most months and dipping slightly below zero on occasion.

This is not the type of model that allows consideration to be taken of policy announcements - it's simply based on the time series of a single variable. What we know about the likely trajectory of the economy, even in the absence of policy shifts that are themselves deflationary, is that the scope for growth is very limited.

The cuts to public spending announced in today's spending review were well heralded in advance. That said, the expectations management of the government has not been terribly sophisticated - there is no room for celebration that the cuts have turned out to be less severe than feared.

The cuts amount to £81 billion per year by 2014-15. This is in addition to £29 billion additional tax revenues that the government hopes to bring in from policies announced earlier. This will much more than wipe out the structural deficit (on any reasonable calculation of what the structural deficit is), and suggests that the government is seeking to leave itself scope for tax cuts later in the parliament. Unfortunately the economy needs the breaks (and certainly not the brakes) now, not in four years time.

The phasing of the cuts is gradual - with around £20 billion extra being taken off the total spend in each of the next four years. In view of the current fragility of the economy a more phased ramping up of the cuts would likely have been prudent. It is not clear that the patient can easily stomach the medicine in the immediate future - we should now expect growth (if indeed there is to be any growth) to be very sluggish indeed over the medium term.

Since cuts of around £80 billion were heralded in the emergency budget, none of the above is terribly new. What is new is the detail about where the cuts will come from. Of the really big spending departments, the hardest hit are to be local government and (as part of the Business, Innovation and Skills budget) the universities. For the latter, the increase in tuition fees proposed by last week's Browne report serves as a useful stealth tax. For the former, the cut will have to be managed by people outside central government. Easy targets, then, that allow the policy makers to say there is a plan when in fact the plan is to let others work out a plan.

Health spending has been protected, as (largely) has education (below the tertiary level). These would, of course, have been tough targets.

A total of almost half a million public sector jobs are set to disappear. The government hopes that the private sector will grow to compensate for this, and cites the forecasts of the Office for Budget Responsibility as evidence. It will be interesting to see if the OBR continues to be so sanguine as time unfolds. I see little reason to share their optimism.

After rising somewhat in August, consumer confidence in September continued its downward trajectory. This should be seen as further evidence to suggest that caution is needed before cutting back too fast on public spending.

The plethora of stories about the future of higher education funding in the UK is multiplying fast, as we await publication of the Browne reivew on 12 October. Over the weekend, it appeared that the interest rate charged on loans would vary positively with graduates' incomes. The media today are full of a somewhat simpler proposal - namely that all but those on the lowest incomes would pay a flat rate of interest.

If, as seems likely, the Browne review recommends either the removal of the cap on tuition fees or a substantial rise in the cap, then charging a flat interest rate equal to the market interest rate would be sensible. Removing the cap (or raising it substantially) gives universities the right to set their own fees for undergraduates - and, since these fees are currently paid upfront by the government with students repaying them using a subsidised loan, this has implications for government expenditure. In effect, the co-existence of a free market in tuition fees and subsidised interest rates means that government would cede control of its own spending. Given its stance on the budget deficit, the current government is hardly likely to do that.

If the cap is removed (or substantially raised) and market interest rates are charged on student loans, the problem is largely solved. To be sure, the government would need to find the money to pay the fees upfront. But, with market interest rates being charged, it could pass this problem on to the private sector. Government could bundle together individual students' debt, and sell packages of the debt to the banks. It needs to do so at a discount in order to make the package attractive, but, with a real interest rate, the discount would need to be much smaller than it is at present.

In 10 days time, we will know the outcome of the comprehensive spending review. Cuts of the order of 25% have been mooted as the government attempts to tackle its budget deficit. It is not clear where the 25% figure comes from - government spending is currently running at around £660 billion per year, and a 25% cut in this would more than wipe out the entire deficit - not just that part of the deficit that is 'structural'.

Around a half of the deficit is due to the shortfall in economic growth over the years of recession and early recovery. During downturns, the government's revenues from tax automatically fall, and government spending rises - both because benefit payments increase and because discretionary policies are put in place to stimulate the ailing economy. This bias towards deficit in a recession is not a long term problem, and that part of the deficit that is due to such factors is not part of the 'structural' deficit that the government is aiming to cut.

It seems, therefore, that the 25% figure is a rather crude attempt at expectations management. At least, one hopes so.

The latest noises about the reform of higher education funding in the UK suggest that the government is considering a move to charge higher interest on student loans to those graduates in higher earning groups.

A side-effect of such a scheme would be that, at a certain level of income, graduates would take home less pay if they worked more. At the trigger point for the higher interest rate, working a little more would cause higher interest to be charged, presumably, on the whole of the loan, thus making the graduate worse off. This is what is sometimes called a 'poverty trap' (though the terminology is ill-suited to the case of high earning graduates).

The government is, rightly, trying to simplify the welfare system so that such poverty traps are eradicated. It would be perverse of it to introduce a poverty trap into the student funding system.

The Liberal Democrats are concerned to ensure that student funding is progressive. As I have noted elsewhere on this blog, it is, however, the progressivity of the whole tax system that matters - not the progressivity of the student loans system alone.

There have to be cuts, and, if cuts there have to be, it is as well to introduce reforms alongside them. In my blog post of 23 June this year, I suggested that a quick win would be to limit the availability of child benefit to those parents who most need it. Today's announcement that child benefit will no longer be available to those households where there is a higher rate taxpayer is therefore welcome.

Also welcome are some of the noises about welfare reform. The government's proposals in this area remain thin on detail - and the detail will matter. But one idea that has been mooted is that benefit claimants taking on a job would be allowed to keep claiming their benefit for a fixed period in addition to their earned income. This would mean that no-one could claim to be made worse off by taking on employment. The length of the fixed period matters, of course. But this would appear to be an idea with some merit.

That said, it is not a policy that should be expected to work miracles in reducing unemployment in the short term. The recovery from recession is likely to be slow, unemployment is likely to rise, and the reason for that will be that the economy's demand for labour remains weak. The welfare reform may well improve people's willingness to supply their labour when the economy is approaching capacity constraints. But that time is quite a long way ahead of us.

The International Monetary Fund has published its latest report on the UK economy. It is not clear from the report whether the authors thought that our glass is half full or half empty. The report begins with a statement that 'the UK economy is on the mend', and the view is expressed that 'the government's strong and credible multi-year fiscal deficit reduction plan is essential'. That finding should not be too surprising in light of the way these reports are compiled.

However, the report also makes the points that

'fiscal tightening will dampen short-term growth', that

monetary policy should remain expansionary and will 'need to be nimble if risks materialize', and that

'an adverse scenario where major new shocks—arising from either external forces or domestic ones—trigger another extended contraction in output cannot be ruled out.'

This, then, paints a somewhat unclear picture. The suggestion that a tough and credible deficit reduction plan is needed is not exactly news. The real debate is about how fast this should happen.

For many students of economics, an early encounter with the elegant and sometimes magical nature of the subject comes in the form of the 'multiplier'. The idea of the multiplier is that an autonomous increase in spending in an economy can ultimately bring about a change in national income that is greater than the initial stimulus. The increased spending that kicks off the whole process might come from government - either in the form of increased government expenditure, or as a result of cuts in tax that allow consumers to spend more.

The mechanism that underpins the multiplier is simple. Suppose the government increases spending by engaging in more construction projects. Builders are hired, and they earn incomes. They then spend those incomes - and these expenditures become an increase in someone else's income. And these other people spend their increases in income, thus passing added income on to yet more people. And so on. Ultimately, because we tend not to spend all of any increase in our pay, this process fizzles out, but (at least in the simple cases studied in the textbooks) not before national income has increased by more than the initial increase in spend.

People, understandably, tend to be suspicious when conjurers pull rabbits out of hats. Likewise, many are suspicious about the multiplier. It does, after all, have something of a 'money for nothing' feel about it. In many circumstances, the suspicions are well founded. If the economy is working close to capacity, then the idea of people doing more, generating more income, is misleading. You can't do more if you're already at capacity. In this case, the expansionary effect of the extra spending tends to produce not more output, but simply higher prices. This being so, then beneficial effects of the extra spending get wiped out - or at least reduced. Economists like to talk about increases in government spending being 'crowded out', and this is one form of that.

But there are times when the economy is not working close to capacity. Right now is an example. What about the multiplier at times like now? Two recent papers from the National Bureau of Economic Research - one by Alan Auerbach and Yuriy Gorodnichenko, the other by Robert Gordon and Robert Krenn - tackle this question. And both studies find, convincingly, that the multiplier is much larger during recessions than at other times. Indeed, during recessions, the multiplier may be as high as 2.5. In other words, extra government spending of £100m can generate an increase in the national income of as much as £250m. During recessions, the risk of such fiscal expansion having a detrimental effect on inflation is minimal.

All of this means that fiscal expansion is a sensible policy to follow during recessions. In a dynamic world, we have to keep an eye on the implications of the policy for our ability to pay back government debt - of course. But the evidence we now have suggests that fiscal policy is much more effective (at times like these) than sceptics once suggested.

Vince Cable has, somewhat confusingly, now rejected his own graduate tax proposal as unworkable, but still wants to retain an element of progressivity in graduates' repayment of their student loans. The question is: why?

Progressivity is very laudable (now there's a value judgement for you). But surely it's the progressivity of the tax and benefits system as a whole that matters, not the progressivity of one little bit of it.

In his speech to the TUC today, Mervyn King provided a pretty fair assessment of the state of play. Global imbalances led to cavalier behaviour on the part of the financial institutions, which in turn led to the near collapse of the financial system, needing huge fiscal stimulus to avert a major depression - leaving us with the challenge of a large fiscal deficit.

King states that 'there is a perfectly reasonable debate about the precise speed at which to reduce the deficit. Indeed, I supported the extra fiscal stimulus to the economy provided in the immediate wake of the crisis. And there is a further question about how the deficit should be reduced - the balance between raising taxes and cutting spending. That is not for me to say; that is for you and the politicians to debate.'

It is, as King argues, 'vital for any government to set out and commit to a clear and credible plan for reducing the deficit'. The present government appears to be engaged in an exercise designed to manage people's expectations. While government departments have been asked to prepare for 25% cuts in spending, such drastic cuts far exceed what is needed in order to eliminate the structural deficit. Nevertheless, the cuts will be severe. Their phasing over the next 4 years or so is critical. The Bank of England's own forecasts do not rule out the possibility of a double dip, and the Office for Budget Responsibility forecasts are somewhat less sanguine. Given changes in the state of the US economy since these forecasts were produced, the outlook is, if anything, less favourable. So, while the time to start reducing the deficit is indeed coming up soon, caution will be needed in judging the right speed at which to go.

The plan should not only be 'clear and credible', it should be sensible too - and that means that it should not involve all guns in blazing from the off.

The annual meeting of the Trades Union Congress takes place this week. Delegates will hear calls for an attack on the government's agenda for cuts. This attack includes the possibility of 'joint industrial action'.

The phasing of necessary cutbacks is certainly a matter of debate. I have consistently argued that the cuts should kick in around the early part of next year, conditional on the recovery being sustained, and not before (see, for example, my post on 14 February this year). Interviews with Nick Clegg and George Osborne last week suggest that there is still ongoing debate within the governmnet about this phasing. Until we know the outcome of this debate - when the spending review is announced next month - any threat of militancy looks impetuous.

A lot of media coverage has been given today to an interesting study about the effects of using a lottery in the allocation of pupils to secondary schools in the Brighton area. Lotteries have long been proposed as a means of reducing the social segregation that can result from a system of catchment areas.

Unfortunately, much of the media coverage has oversimplified the results. A curious feature of the Brighton scheme is that catchment areas (which have traditionally served to allocate pupils to schools on the basis of where, in relation to the school, they reside) have continued to exist. Alongside the introduction of the lottery scheme, the catchment areas were however redefined. So a lot of things that might affect the allocation of pupils to schools happened at once.

The evidence provided in the research suggests that the lottery scheme has led to some convergence across schools in the characteristics of pupils that they attract. This is as we would expect. The redrawing of catchment areas has, however, meant that this experience is uneven across the city, with outcomes after the reform being worse (than they would otherwise have been) for some pupils who were previously (but who are no longer) in the catchment area of a good school. None of this is terribly surprising - demonstrating that strange things get into the news during the silly season.

(To reinforce the last point, the front page headline of the Times newspaper on each of the last two days has told us the news that... apparently something didn't happen 14 billion years ago!)

Consumer confidence continues to sink, and house prices are now once more on a falling trend. The latter, at least, is not all bad news. The acceleration in house prices up to July had been something of a puzzle since the earlier fall had not been sufficient to burst the bubble. While I have not been amongst those economists predicting a 30% or more fall in house prices from their peak, I did expect the recovery in prices to be sluggish. Initially it wasn't, raising fears of more boom and bust in that market, and in this context the slowing down that we have seen over the summer is something to be welcomed.

The news on consumer confidence is more disturbing, and I await the August figures with interest.