Michael McMahon's picture
Affiliation: 
University of Oxford
Credentials: 
Professor of Economics

Voting history

Economic Consequences of an Independent Scotland June 2014

Question 2

Assuming that Scotland becomes an independent country, do you agree that the UK government's position of ruling out a monetary union is in the economic interests of the continuing UK? 

Answer:
Disagree
Confidence level:
Confident
Comment:
I believe that there could be gains to the whole UK of retaining a single currency in use within the island. In the respect of the optimal currency area criteria, a UK currency union probably makes more sense than the euro area. The two areas are clearly in a position to operate successfully with a single currency given that they already do. However, there are some complex details that would need to be sorted out (as there always are in forming new monetary unions). Of particular relevance in this case, given the size of the sector in Scottish GDP, is the extent to which the monetary union also entails a banking union despite the absence of a fiscal union. The arrangements for how supervisory responsibility would operate in any monetary union won't be made easier by the fact two of the major banks that are registered in Scotland have had serious difficulties in the last 6 years.

Question 1

Do you agree that that Scotland would better off in economic terms as an independent country?

Answer:
Disagree
Confidence level:
Confident
Comment:
At least initially I think there will significant economic transition costs. However, in addition to the exact economic terms with the UK, the extent of the adjustment costs depend on the issue of EU membership. Any prolonged period outside the EU could be costly in terms of attracting FDI and keeping the existing businesses that could otherwise be attracted to remain inside the EU for ease of trade reasons. Related to that, those hoping for independence will have welcomed the recent European Policy Centre report that states that EU membership could be resolved very quickly.

Prospects for Economic Growth in the UK April 2014

Question 2

Do you agree that, in the wake of the financial crisis, any downward adjustment to the expected average annual long-term growth rate of the UK economy is likely to be by less than 0.25 percentage points?

Answer:
Agree
Confidence level:
Confident
Comment:
While I expect growth to be weaker in the near term than in the period from 1995-2007, I do not expect that GDP growth in the longer term (5+ years) will be hugely affected by the financial crisis. There are other factors, such as developments in demographics, which will mean growth rates are affected, but I do not believe the financial crisis will have induced permanently lower growth in supply capacity. This is despite my pessimism that that most the sharp drop in the level of output may be persistent.

Question 1

The long period of slow or negative growth might imply that there is a substantial output gap in the UK economy.  Do you agree that there is currently a larger output gap than the OBR estimate to the extent that the shortfall in output relative to capacity is 3% or greater?  

Answer:
Neither agree nor disagree
Confidence level:
Not confident
Comment:
I tend to be pessimistic that, at least in the short- to medium-run, the UK's supply potential has been reduced as a result of the financial crisis. Together with persistence of the 8% drop in GDP from 2008-2009, I have expected weaker growth to persist for some years, and still expect growth to be weaker in the near term than in the period from 1995-2007. However, I remain very uncertain about the true size of the output gap and my best guess would probably be a very wide range of 2-4% which straddles the 3% value in the question.

Responsible long-term fiscal policy (pilot survey)

Second question:

To help ensure that advanced country governments pursue responsible fiscal policies, countries should adopt formal rules for limiting structural deficits, which are supported by primary legislation or constitutional reform.

Answer:
Agree
Confidence level:
Confident
Comment:
I am in favour of rules governing fiscal policy limits so long as those rules ensure that elected politicians can select the balance and allocation of spending and tax within those limits. Any legislation must set rules that take account of different country situations, and expected future liabilities; this means that structural deficit limits may need to be time-varying. And it is vital to have an appropriate system for adjusting appropriately for cyclical effects; I remember that an attempt by the European Commission to cyclically-adjust EU fiscal deficits failed because countries could not all agree on a single method to cyclically-adjust the deficit.

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