Jonathan Portes's picture
Affiliation: 
National Institute of Economic and Social Research
Credentials: 
Director

Voting history

Autumn Statement & Charter for Budgetary Responsibility

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Question 2: Do you agree that the Charter for Budgetary Responsibility is helpful in underpinning the credibility of fiscal policy?

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Answer:
Strongly Disagree
Confidence level:
Very confident
Comment:
The Charter is poorly designed, and indeed represents a significant step backward compared to the fiscal framework that operated during the previous Parliament. In particular, it is simply not credible, in the strict sense of the word, as d) below demonstrates. There are at least four significant defects: a) the surplus target. There is no theoretical or empirical justification for targeting an absolute surplus. The Treasury, in July, claimed that “Running a surplus on the headline measure of borrowing is the only sustainable way to bring down debt as a share of GDP in the long term.” As a matter of arithmetic, of course, this is simply wrong. In fairness to the Treasury, there is no definitive answer here. But recent IMF research suggests that the costs of aggressive debt reduction (in terms of reduced growth and investment now) are rather high, while the ‘insurance’ benefits of a low debt level are rather low. b) the lack of any distinction between current and capital spending, giving the government a further incentive to under-invest (as it has for the last 5 years) at time when long-term interest rates remain very low c) the fact that (post 2019) the target applies in every year; this almost guarantees an unnecessary and damaging degree of pro-cyclicality d) the poorly designed and non-credible "get-out clause" in the case of a negative shock. As the OBR pointed out, a sustained period of 1.5% growth would lead to a fiscal shortfall of about £20-30 billion without triggering the clause. In principle, this would have to be made up by tax increases or additional spending cuts. This is simply not remotely plausible. It is inconceivable that the government would respond toa prolonged period of slow growth by implementing an extra £20 billion in spending cuts (on top of an already very demanding set of reductions); or that (particularly given its commitment not to raise the rates of the main taxes) it would put up taxes by this amount. So in such circumstances, there is absolutely no doubt that (as in the last Parliament, but against the backdrop of a much more elastic fiscal rule) it would, entirely sensibly, allow the progress of deficit reduction to slip again. In other words, for the period of this Parliament, the new fiscal rule is simply incredible, in the strict sense of the term: nobody should believe it.

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Question 1: The Chancellor forecasts a cyclically adjusted fiscal surplus by 2017-18 and in cash terms by 2019-20. Do you agree that this planned path of fiscal consolidation is appropriate?

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Answer:
Disagree
Confidence level:
Confident
Comment:
My view is that the pace of fiscal consolidation is somewhat too fast, given both the OBR and consensus forecasts see UK growth slowing somewhat, while global growth remains sluggish. However, if the current central forecasts are indeed accurate, the macroeconomic impact will be relatively modest. The more significant objections to the government's fiscal plans are two-fold. First, they are very risky. There is clearly a significant chance that, for domestic or international reasons, will be considerably weaker. In that case the planned consolidation will be very damaging, and the government's fiscal framework may well make things worse not better (see Q2). Second,the plans rely too much on spending cuts (as well as some not particularly efficient tax increases), in order to finance unnecessary and often regressive tax cuts (for example, to inheritance tax). While this does not have significant direct macroeconomic consequences, it may well lead (as with tax credits/Universal Credit) to decisions which are likely to be quite damaging over the medium term.

ECB's quantitative easing

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Question 1:

Do you agree that the design of the ECB's QE programme reduces its effectiveness? 

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Answer:
Disagree
Confidence level:
Not confident
Comment:
In current circumstances I think the impact on market interest rates/market behaviour and hence on the effectiveness of eurozone QE is likely to be relatively modest.

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Question 2:

Do you agree that the structure of the ECB's QE programme makes the Eurozone more fragile and increases the risk of one country leaving the euro?

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Answer:
Agree
Confidence level:
Confident
Comment:
The issue is less about the direct impact (which in current circumstances is likely to be marginal) than the signalling effect: the structuring, and the internal debate and compromise within the ECB it reveals, clearly implies that there are possible circumstances in which monetary union could be reversed.

Deal or no deal: The Greece standoff

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Question 1:  

Do you agree that, on balance, the implementation of the agreement as outlined in media reports will have a non-trivial negative effect on Greek GDP?

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Answer:
Neither agree nor disagree
Confidence level:
Not confident
Comment:
It depends on counterfactual. Relative to disorderly default and political crisis, deal is preferable.However a much more comprehensive deal with less contractionary fiscal policy, substantial debt write off, and more product market and public administration reform would be greatly preferable

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