Patrick Minford's picture
Affiliation: 
Cardiff Business School
Credentials: 
Professor of economics

Voting history

Brexit and financial market volatility

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Question 1: The value of the pound fell sharply this week. Do you agree that the public debate on Brexit can be expected to (continue to) lead to a substantially higher level of exchange rate volatility in the upcoming months?

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Answer:
Agree
Confidence level:
Confident
Comment:
There is substantial failure to understand that Brexit is about long-run structural reform of the UK economy- leaving the EU will get rid of EU protectionism and regulative intervention from an essentially socially motivated viewpoint in UK economic affairs. It will alsoprotect the UK against further entanglements in the new 'euro architecture'. So in the short run rising Brexit probability will push sterling down. However as understanding of these structural issues increases with the ongoing leave campaign which will combine populism on sovereignty and immigration with sophistication on economics, sterling will recover and may in the end wind up stronger. This will probably make for volatility.

Market Turbulence and Growth Prospects

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Question 2: Do you agree that the falls in share prices, low oil prices and the slowdown in some emerging market economies will have a significant negative impact on the UK’s economic recovery?

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Answer:
Disagree
Confidence level:
Confident
Comment:
Basically my answer follows the analysis in my first answer which relates to the world economy. But for the UK the strengthening world background (in spite of the difficulties of some emerging market countries, mainly primary producers) will be positive. Low material prices are positive for UK consumers and investors. Share prices will recover as these things work through. N Sea oil is of course negatively affected; but positive effects elsewhere in the economy are much stronger. The UK recovery should continue.

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Question 1: Do you agree that economic growth prospects for the global economy have seriously deteriorated?

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Answer:
Disagree
Confidence level:
Confident
Comment:
Very low commodity prices are a usual feature of the post-recession world economy. The last major example was in the 1980s and 1990s, when for example oil dropped below current real levels for more than a decade. This results from large overcapacity in materials production after rapid growth gives way to slump and initially slow recovery. Investment in material capacity is being sharply cut back. But investment in final production is growing and will get stronger. There is probably also a boost to world consumption since primary producing countries seem to cut back consumption less than consuming countries raise it. China is one element in this excess capacity and is eg pushing excess steel supplies onto world markets ad cutting back steel capacity. However it is aiming to boost consumption spending and this is already occurring with fast growth in retail sales and services consumption. World growth is running around the 3% mark, which is lower than the 5% or so in the mid 2000s but that growth then was unsustainable and seems to have been fed by rapid credit growth. Growth at current rates will not ignite another such boom unless monetary policy becomes highly stimulative. Currently monetary stimulus from QE and 'zero' interest rates is having its effect offset to a large extent by the post-crisis surge in bank regulation which has caused banks to shrink their balance sheets, particularly for 'riskier' loans to smaller businesses. Hence monetary stimulus is still fairly weak overall. It is likely that bank regulation will be eased and monetary stimulus increased- eg by the ECB; but the Bank of England is reluctant to tighten while the Fed has said rates will be raised very slowly. With final consumers and investors spending more anyway, growth is likely to strengthen.

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:
Agree
Confidence level:
Confident
Comment:
The institution of the OBR has been useful. As an independent watchdog it has brought some extra credibility to public finances. As for the Charter, its aim of a surplus in 'normal times' is laudable for now, while debt/GDP is above 80% and looks like being above 60% for the foreseeable future. The arithmetic for the decline in debt/GDP is that if nominal GDP is growing at say 4% (2% real growth plus 2% inflation) then at a balanced budget debt/GDP at 80% will fall by 3.2 percentage points per year. A small surplus effectively guarantees this rate of fall as a minimum; this rate falls to 2 points once debt reaches 50% of GDP. So to bring debt down to 50% of GDP from the current 80% roughly speaking requires a dozen years of balanced budgets. Allowing for the usual slippage on current targets, we are looking at getting debt/GDP down to 50% of GDP by around 2030. Hence it seems right to support the Chancellor's 'normal target' of a surplus for the foreseeable future. Once debt ratios come down to sustainable levels we can loosen it up to a 'normal deficit' of around 2% of GDP which would keep the debt/GDP ratio constant.

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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:
Strongly Agree
Confidence level:
Extremely confident
Comment:
So far the UK has taken about six years to eliminate 60% of its original deficit in 2009-10. This slow and deliberate elimination was wise, given the extreme disruption to the UK economy and is to be contrasted with the mistaken and dangerously fast elimination in southern euro-zone countries due to the faults in the euro construction. However the world is now moving towards a normalisation of interest rates and there will also be a continuation of global recovery which will strengthen the rise in real rates. The cost of servicing public debt will sharply increase; no longer will the government be able to enjoy the financial repression we have seen to date. Furthermore there will be a resumption of much stronger credit growth as banks both regain their confidence and governments retreat from the draconian and mistaken bank regulations post-crisis; this resumption will compel the liquidation of the massive QE programme which has landed central banks with large quantities of government debt (about a third in the UK). In summary markets will be moving against government debt in the coming half decade- yields will be rising, possibly sharply. UK government debt is set to peak at just over 80% of GDP, It makes sense to bring it down towards around 50% or less in the next decade or so. Getting back to a surplus makes sense for this period as it will bring debt down quite rapidly as a share of GDP, and away from the danger zone above 60% where crises would be hard to manage..

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