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

Voting history

Autumn Statement & Charter for Budgetary Responsibility

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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:
I don’t think the planned (quite aggressive) spending cuts are necessarily needed at this point and so falling short of the planned cuts would be desirable. If the fiscal surplus is to be achieved, I hope it is because a continued recovery allows revenue collection to meet or surpass its target. Of course, I think there are many downside risks at the moment which would manifest themselves as weaker UK economic growth. My fiscal concern in case these are realised is that the government sticks to, and even increases, the size of the spending cuts in an effort to meet surplus targets.

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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:
Disagree
Confidence level:
Very confident
Comment:
There are two main objections that I have. First, I do not like the focus on a surplus in terms of the fiscal balance. What matters is the sustainability of debt and this should be measured as a percentage of GDP. A surplus on the fiscal balance does not guarantee any sort of fiscal sustainability. Sustainability depends, among other things, on the rate of interest relative to the level of economic growth. A deficit could comfortably be sustained (and even lead to declining debt to GDP) if growth and interest rates are favourable. But equally, a surplus on the deficit does not guarantee sustainable or falling debt as a percentage of GDP. The second objection is the treatment of investment. It is clear that some forms of public investment are necessary for continued UK growth but such spending typically takes longer to bear fruit. As such, by treating it equally to other types of government expenditure, I fear it will be public investment that suffers the most by governments trying to achieve this charter targets.

China’s growth slowdown: likely persistence and effects

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Question 2:

Do you agree that if the Chinese slowdown turns out to be persistent, it will have a significant impact on UK growth (say, in the order of a few tenths of a percentage point) and/or it will justify a material change in monetary policy (for example, in terms of the timing and speed of a return to ‘normal’ interest rates) and fiscal policy (for example, in terms of the timing and speed of fiscal contraction).

Answer:
Agree
Confidence level:
Very confident
Comment:
I think we are already seeing the large effects on countries in the Asia-Pacific region. Australia and Indonesia, both major commodities suppliers to China, are being hit by the manufacturing and investment slowdown. This then has a knock-on effect of causing slower growth in the region which is supposed to be a major engine of global growth. With much of the EU already weak, weakness in Asia-Pacific further hits European economies. This is especially true for Germany who is a major exporter to China (especially investment goods) and the largest EU economy. This spells trouble for UK economic growth even if the direct links are not as large as those with the US and EU. This also contributes to the relative strength of Sterling viz-a-viz the euro. Persistent Chinese weakness would simply exacerbate these effects lowering UK growth. As continued sterling strength would mitigate inflationary pressures, I would see no reason for the Bank of England to rush to lift off from their ZLB, or rush to get back to some new normal level of interest rates.

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Question 1:

Do you agree that the Chinese economy is likely (say more than 50% probability) to maintain in the medium term (say, for at least ten years) a rate of annual growth exceeding 6%.

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Answer:
Agree
Confidence level:
Very confident
Comment:
The very easy answer is that I believe that official statistics will show such growth. However, there are (and have always been) question marks over the extent to which they are a true reflection the economic situation. I would be surprised if official figures dropped persistently below 6% and expect an average of around 7-8% at least for the next 5 years or so (barring another major global recession which might temporarily knock these numbers lower). That said, I think there is a more marked slowdown in China underway already. I am very uncertain as to the exact extent of it, but in my more pessimistic moments, it entails current and medium-term forecast growth rates of 3-4% rather than the official figures of 7-8%. The slowdown in manufacturing is clear from lots of official data sources and investment is therefore slowing. The uncertainty concerns the replacement of this demand with services output and consumer led expenditure. The problem is that, after years of examining the Chinese industry, analysts seem less clear on how to measuring the sectors that are supposedly filling the gap.

ECB's quantitative easing

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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

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