COVID-19 and UK Public Finances

Question 1: How urgently should the UK government address the rise in public debt?

Question 2: What is the best way to (eventually) reduce public deficits and debt?

Summary

Public debt has risen to unprecedented peacetime levels, due to policies put in to place to address the economic fallout from COVID-19. Nevertheless, the CfM panel was nearly unanimous that the Treasury should not take any action to decrease the deficit in the upcoming budget. The panel was split on when it would be wise to publically announce long-run plans to address the deficit and the debt. At that point, the majority of the panel supports a mix of financing options, with tax increases receiving strong support and not a single panellist supporting public spending cuts.

Background

The May 2020 CfM survey surveyed its panel of top UK economists on the urgency of addressing UK public debt and the ways to do so.

COVID-19 and UK Public Debt

The UK government has supported the economy with a variety of measures in response to the COVID-19 crisis. This has led to an unprecedented increase in public deficits in peacetime. The Office for Budget Responsibility forecasts a budget deficit of £300 billion this year, more than 15% of UK GDP. Public debt is expected to exceed 100% of GDP by the end of the year. Despite this increased borrowing, the UK government is borrowing at negative rates for horizons of up to 3 years and can currently borrow at 50 year maturities for less than half a percent annually.

Internal Treasury documents indicate that the Exchequer has begun planning measures to reduce the deficit in upcoming years”. Goodhart and Pradhan (2020) predict rising inflation if public and private debts aren’t addressed. Others have suggested that it is premature to take action or even commence planning for deficit reduction. Nick Macpherson, a former top Treasury official, said: “You don’t want to have a Budget while the crisis is in full throttle.” Paul Johnson of the Institute of Fiscal Studies suggests waiting until the end of 2021, “once we have a better idea how well the economy has recovered.”  The Economist has also opined that “rich-world governments will make a big mistake if they succumb to premature and excessive worries about budgets

In this month’s survey panellist were asked on the urgency of deficit reduction and how this deficit reduction should be achieved.

Question 1: How urgently should the UK government address the rise in public debt?

Thirty panellists responded to this question. The panel was nearly unanimous (one dissent) that no measures should be taken in the upcoming budget. The vast majority of the panel (63%) stated that there was no need to take any action or announce budgetary changes to address public debt until the pandemic subsided. The remaining panellists were split on whether the government should present concrete plans sooner rather than later (20%) or that focus on the public debt was counterproductive (13%).

Uncertainty on the scale and duration of the pandemic and its economic consequences was the main argument for postponing the discussion on public debt. David Cobham (Heriot Watt University) thinks it “[b]est to wait until some of the dust at least has settled, otherwise we can't see what we're doing.” Thorsten Beck (Cass Business School) elaborated that at this point stage, “it is not even clear how long the pandemic will last and how many waves there will be and what the ultimate economic cost will be.” Panellists further didn’t see room for concern that requires immediate action.  Wouter Den Haan (London School of Economics) notes that “we know countries like the UK can deal with high debt levels and right now there are obviously more important concerns.” Some participants, like John Van Reenen (London School of Economics) views austerity during the global financial crisis as a mistake, from which we should now learn.[1]

Those supporting long-term plans raised concerns that ignoring the deficit entirely would create uncertainty that might hamper the recovery, Ricardo Reis (London School of Economics) notes that “having a clear long-term plan for fiscal policy would anchor expectations. It would remove one of the usually bigger sources of uncertainty for investment.” Kate Barker (British Coal Staff Superannuation Scheme) suggests that instead of a plan, “HMT should introduce a few measures but launch a consultation on the pace of deficit reduction and tax and spend measures.” She also notes that this would be an opportunity address some longer term challenges: “The National Infrastructure Statement is needed to help with recovery and the way forward on climate change. And it would be very appropriate for a proper policy on social care finally to get the priority it deserves.” While only 20% of panellists supported long-term plans to address the deficit, a few supporters of the majority view implied in their comments that long term fiscal plans would be wise.

The minority opposing plans to address the public debt in the foreseeable future instead expressed concern that excessive focus on the public debt would come at the expense of aiding the recovery. Simon Wren-Lewis (University of Oxford), for example, opposes any budgetary deficit reduction unless interest rates began rising.  Wendy Carlin (University College London) also asked to shift the discussion from public debt concerns to “minimizing the damage to education, R&D, investment, start-ups etc. and on supporting incomes until economic activity can resume.”

Addressing Public Debt

A debate has emerged on financing methods for the massive increases in government debt worldwide. The most direct way to reduce deficits is by cutting public spending or increasing tax revenues. The Treasury’s internal estimates suggest that freezing public sector pay would lead to savings of of £6.5 billion by 2023-24. The Social Market Foundation points to the generous indexing of public pensions (the triple lock) as an attractive target for spending reductions. Although the Conservative manifesto promised no increases in income, VAT, or National Insurance taxes, the Treasury is contemplating tax hikes. The Chancellor has indicated that the crisis might be an opportunity to increase self-employment National Insurance tax rates to better align with wage earners’. The Labour manifesto called for wealth taxation even prior to the pandemic; although support for such measures from Labour’s new leadership is yet to be seen. The Financial Times provides a useful summary and a podcast on panoply of budgetary measures that could be used to reduce the public debt.

Debt reduction efforts following the Second World War, point to other debt reduction strategies. Public debts of high income countries eroded through a combination of higher inflation and artificially low interest rates supported by regulatory measures such as capital controls (financial repression). A number of commentators have advocated a return to these practices.  Adam Tooze points to these historical experiences and proposes direct monetary financing of deficits: “Under ordinary circumstances one might worry about that causing inflation. But given the recession we face that is a risk worth running. Indeed modest inflation would help us by taking a bite out of the real value of the debt.”  Wilhelm Buiter has suggested that increasing inflation targets to 5% would do the trick, but notes little appetite for such policies in high income countries. 

Following the Napoleonic wars, the UK took a different approach of issuing consols (or perpetual bonds). The US took a similar approach following the Civil War and the UK issued some consols following the First World War. These are bonds that never mature, but whose coupons are serviced indefinitely. George Soros has advocated  issuing consols to address COVID-19-related public debt and the Spanish government has proposed these debt instruments as a way to finance recovery efforts in the Eurozone (see also Gaivazzi and Tabellini, 2020 and Verhofstadt and Garicano’s April 15 editorial. Corsetti et al 2020 argue against these instruments.) Current yields on UK bonds are at unprecedented lows.

Economic growth could reduce the deficit and debt as a share of GDP, but it is unclear which policies would guarantee higher economic growth in current circumstances.

In this regard, the CfM panel was asked:

Question 2: What is the best way to (eventually) reduce public deficits and debt?

Thirty panellists responded to this question. Many respondents supported a policy mix that involves more than one of the proposed policies. Several respondents expressed hopes that economic growth would do its share in reducing the effective size of the public debt. In ranking individual policies, respondents were nearly equally split between those supporting tax increases and those supporting the issuance of perpetual bonds, with 30% support for each, although supporters of tax increases expressed greater confidence. A smaller share (13%) supported higher inflation. Not a single panellist expressed support for public spending increases (or financial repression).

Supporters of tax increases noted that UK public sector, whose importance the COVID-19 crisis has further underlined, has been stretched for some time. Tony Yates (University of Birmingham) argues that “a larger and more resilient state is likely to be needed to put us in a better position to fight future pandemics, and also to redress some for the regressive aspects of them.” Jagjit Chadha (National Institute of Economic and Social Research) notes that “we have a sustained increase in the demand for the provision of public goods.” Kate Barker (British Coal Staff Superannuation Scheme) suggests that higher taxation might be necessary to support the economic recovery. She writes: “There is a high risk that the better-off will continue to save more - taxing in order to support demand may be important - and in the longer run part of the deficit reduction.” Andrew Mountford Royal Holloway suggested specific tax measures, including “property tax as the most efficient way to do so and to use the revenues not only for debt reduction but also for substantial public investments.”

Supporters of perpetuities pointed out that the UK government can borrow at unprecedentedly low rates and that this financial instrument allows the government to increase taxes at a time of its choice. As Michael Wickens (Cardiff Business School & University of York) puts it: “consols give the government the option to decide on the timing of tax increases”, should these be necessary if “interest payments [prove] too costly.” Thorsten Beck (Cass Business School) points to the distributional implication of perpetual debt: “Consols are an important and maybe primary tool forward, as they spread the costs across generations. Perpetuities, provided they were at a low rate of interest, would prevent the need for fiscal tightening. This would benefit the economy most as it struggles to recover.”

Other respondents expressed scepticism about the viability of inflation and perpetual bonds as financing options. Martin Ellison (University of Oxford ) and Ricardo Reis (London School of Economics) each point to their research showing that inflation can do little to raise revenues or erode the public debt.[1] Ellison further warns that consols will be costlier than current estimates cited above “if they are issued with the express aim of inflating them away in the future,” because in this case “investors will demand hefty inflation risk premia”.

References

Bagaria, Nitika ,Dawn Holland, and John Van Reenen, “Fiscal Consolidation During a Depression” Centre for Economic Performance Special Paper No. 27. August 2012, http://cep.lse.ac.uk/pubs/download/special/cepsp27.pdf

Corsetti, Giancarlo, Aitor Erce, Antonio Garcia Pascual, “Future imperfect after coronavirus.” VOX, CEPR Policy Portal, 14 May 2020, https://voxeu.org/article/using-perpetual-bonds-finance-european-recovery-fund

Ellison, Martin and Andrew Scott “Managing the UK National Debt 1694–2018,” forthcoming in the American Economic Journal: Macroeconomics, 2020.

Giavazzi, Francesco and Guido Tabellini, “Covid Perpetual Eurobonds: Jointly guaranteed and supported by the ECB.” VOX, CEPR Policy Portal, 24 Mar. 2020, https://voxeu.org/article/covid-perpetual-eurobonds  

Goodhart, Charles and  Manoj Pradhan, “Future imperfect after coronavirus.” VOX, CEPR Policy Portal, 27 Mar. 2020, https://voxeu.org/article/future-imperfect-after-coronavirus

Reis, Ricardo, “Can the Central Bank Alleviate Fiscal Burdens?”, unpublished manuscript, 2017.  http://personal.lse.ac.uk/reisr/papers/19-HofCB.pdf

 

[1] See Ellison and Scott (forthcoming) and Reis (2017).

 

 

[1] Van Reenen and co-authors elaborate on this in Bagaria et al (2012).

Contact us for more information

How the experts responded

Question 1

Participant Answer Confidence level Comment
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Extremely confident
The government can borrow in perpetuity at half a percent. The market is paying the UK government to lend to it. This could very well change but I think it would be unwise to be concerned about hypothetical public debt crises in face of the worst recession in living memory.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research HM Treasury should present a long-term plan to reduce the deficit as soon as possible, but not introduce measures to do so in the upcoming budget Very confident
Fiscal policy events have become quixotic. The framework needs serious re-working. We are planing a review of the "rules" this Autumn and I would also encourage a careful examination of revenues. By paying more careful attention to the framework, targets and instruments as well as committing to a clear timetable for fiscal events, there is a lot of time to consider the appropriate degree of tax smoothing in response to this period of heightened expenditures.
Martin Ellison's picture Martin Ellison University of Oxford There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Very confident
Now is not the time to worry about repaying the debt. HM Treasury has more important things to worry about.
Andrew Mountford's picture Andrew Mountford Royal Holloway HM Treasury should present a long-term plan to reduce the deficit as soon as possible, but not introduce measures to do so in the upcoming budget Very confident
The UK should fund the necessary public investment program with the introduction of a significant land and property tax. In the short term the UK clearly needs to invest in the productive capacity of the economy (human capital stock, public capital stock, environmental sustainability). The borrowing this entails should be backed by the value of the assets generated by this investment. If the investments are productive they should lead to a rise in productivity of the UK and so a rise in the value of wealth in the UK. Thus a natural way of financing the necessary inverstment would be to tax the beneficiaries of this investment with a tax on all land and property in the UK.(i.e. assets which benefit from the investment but which cannot be moved to avoid taxation). The ONS estimates the value of land and assets-over-land to be over £5Trillion compared to a GDP of c£2Trillion. Thus a 1% tax pa would be worth 2.5% of GDP pa. Such a tax wouldn't need to be collected immediately. It could be collected when the land is sold or transfered, the tax claim accumulating each year as a government asset. After 50 years of no-sale or transfer the state would have the right as majority shareholder to sell the land/property on the open market (with appropriate safeguards to ensure that owners who had been continuously living in the property for 50 years wouldn't be evicted). Would the tax cause land values to crash? If the public investment is productive then it shouldn't but even if they fall by 50% the tax could still back a large spending program. Plus a property price fall should cause a rise in disposable income of the younger generation which may also lead to increased growth and investment which would be equilibriating. Thus in short the UK should fund the necessary investment program by borrowing backed by the introduction of a significant land and property tax.
Kevin Hjortshøj O'Rourke's picture Kevin Hjortshøj... Oxford University Budgetary policy should not be used to address public deficits and debts in the foreseeable future Not confident
None of the suggested responses really reflected my view, which is that (1) right now the budget is not an issue; (2) of course in the long run it will be an issue; (3) we don't know how long the present crisis will last or for how long fiscal policy will need to remain accommodative, so what we can say right now is very limited.
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Budgetary policy should not be used to address public deficits and debts in the foreseeable future Extremely confident
Only when the economic recovery from the pandemic is complete, and as a result interest rates are rising, will it be the time to consider what action, if any, to take on budgetary policy. In particular concerns about the deficit should not be used to prevent any fiscal stimulus that may be required to get the economy going again once the pandemic is over.
Elias Papaioannou's picture Elias Papaioannou London Business School There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Confident
Chryssi Giannitsarou's picture Chryssi Giannitsarou University of Cambridge, Faculty of Economics HM Treasury should present a long-term plan to reduce the deficit as soon as possible, but not introduce measures to do so in the upcoming budget Confident
Tony Yates's picture Tony Yates University of Birmingham There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Confident
Deficit spending now is needed to ensure continued compliance with the lockdown, and to minimise the risk of an overhang from the self-engineered shutdown when restrictions are lifted. It will also be needed for some time to come after restrictions are lifted. A fiscal contraction now would be counter-productive.
Nicholas Oulton's picture Nicholas Oulton London School of Economics There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Very confident
Michael McMahon's picture Michael McMahon University of Oxford There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Very confident
The government is, correctly, in the "whatever-it-takes" phase and so there is no sense in trying to begin a fiscal adjustment now. Until there is some greater certainty about the length of the health crisis and we move to the recovery phase, there is little sense in proposing specific plans which would need to change as uncertainty is realised. What could be usefully proposed sooner, and even consulted upon, is broad set of principles for how the adjustment will take place. Even without specific figures, it could help communicate when plans might be put in place to undertake any fiscal adjustment, what will determine the scale of adjustment needed by explaining the objectives/targets of the government, and how the burden of adjustment might be spread in terms of instruments (tax increases versus spending adjustments) and on whom (intergenerationally? sectorally? across the income distribution?).
Thorsten Beck's picture Thorsten Beck Cass Business School There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Very confident
In the long-run, government debts have to be addressed, but doing so prematurely could be fatal for economic recovery. At this stage, it is not even clear how long the pandemic will last and how many waves there will be and what the ultimate economic cost will be. Once this has become clear, a long-term plan should be presented to address public (and private) debt!
Wendy Carlin's picture Wendy Carlin University College London Budgetary policy should not be used to address public deficits and debts in the foreseeable future Confident
Announcements about the size of the forecast increase in government debt and how worrying it is should be replaced by clear messaging about the shock-absorber role of public debt as the government plays its role as insurer or last resort. The focus should be on minimizing the damage to education, R&D, investment, start-ups etc. and on supporting incomes until econoimc activity can resume - not on the public debt. It is lack of attention to the former through an unbalanced concern with publc debt that will produce an increased burden on younger people.
Wouter Den Haan's picture Wouter Den Haan London School of Economics There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Very confident
we know countries like the UK can deal with high debt levels and right now there are obviously more important concerns
Roger Farmer's picture Roger Farmer University of Warwick There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Confident
I favor monetary financing in the short run that will, and should, lead to price increases. That view is conditioned on a policy in which large deficits are temporary.
Paul De Grauwe's picture Paul De Grauwe London School of Economics There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Confident
David Cobham's picture David Cobham Heriot Watt University There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Confident
Best to wait until some of the dust at least has settled, otherwise we can't see what we're doing.
David Miles's picture David Miles Imperial College There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Confident
Assuming the pandemic is - effectively - over by some time in the first half of next year and (crucially) that yields on gilts do not spike upwards then announcing a strategy now to bring down the debt to GDP ratio is neither needed nor useful. It is not useful because until we know the state of the economy and the level of debt at the end of the pandemic it is not realistic that people will believe any strategy.
Ricardo Reis's picture Ricardo Reis London School of Economics HM Treasury should present a long-term plan to reduce the deficit as soon as possible, but not introduce measures to do so in the upcoming budget Very confident
It seems unwise to focus on paying for the public debt right now, when we are not even at the trough of the economic cycle. But having a clear long-term plan for fiscal policy would anchor expectations. It would remove one of the usually bigger sources of uncertainty for investment.
Angus Armstrong's picture Angus Armstrong National Institute of Economic and Social Research There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Extremely confident
Over insuring in a crisis usually pays dividends.
Kate Barker's picture Kate Barker British Coal Staff Superannuation Scheme HM Treasury should present a long-term plan to reduce the deficit as soon as possible, but not introduce measures to do so in the upcoming budget Confident
The ideal response for me would have been that in the upcoming budget rather than a 'plan' HMT should introduce a few measures but launch a consultation on the pace of deficit reduction and tax and spend measures (there are also decisions about how to roll forward spending given no spending review). Some decisions should be progressed asap - the National Infrastructure Statement is needed to help with recovery and the way forward on climate change. And it would be very appropriate for a proper policy on social care finally to get the priority it deserves.
Linda Yueh's picture Linda Yueh London Business School There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Confident
It is premature until the scale of the pandemic is better understood and how it might subside.
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Very confident
Fiscal policy should aim to stimulate the economy until the lockdown is over and not depress it by raising taxes. Government expenditures will return to near normal once the current support for businesses and employees ceases. They need not be cut otherwise. I could make an exception for HS2.
Patrick Minford's picture Patrick Minford Cardiff Business School There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Extremely confident
The government needs to see out the pandemic, financing its needs by borrowing. Currently the Bank is buying up this debt on the open market via QE,so that effectively the public sector is selling no debt on the markets. The Bank should dispose of its holdings as soon as the market can absorb it at current very low interest rates; the government should aim to issue at the longest possible maturities to lock in currently very low rates of interest. Once the Bank has reissued these to the market, the government will then face low costs of debt financing over the long term, which will keep the future cost to taxpayers down. Once the pandemic is over, a longterm plan can be drawn up for supporting the economy with taxes as low as possible and necessary spending while ensuring that longterm solvency is ensured.
John VanReenen's picture John VanReenen London School of Economics There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Very confident
It is now clear that a major policy mistake in the UK was moving to austerity too quickly after the Global Financial Crisis. We must not repeat the same mistake again. See my piece here for example, http://cep.lse.ac.uk/pubs/download/special/cepsp27.pdf
Panicos Demetriades's picture Panicos Demetriades University of Leicester Budgetary policy should not be used to address public deficits and debts in the foreseeable future Extremely confident
Unless the war is over, it is premature to start even planning for debt reduction. The mere talk of taxation or cuts will create lobby groups against current levels of public spending and can derail the war effort. The economy will plunge into depression if the government becomes hesitant to spend during this unprecedented war. Even worse, if health spending is affected, we could be facing a very long war indeed.
Lucio Sarno's picture Lucio Sarno Cass Business School HM Treasury should increase taxes or cut spending in the upcoming budget Very confident
Tim Besley's picture Tim Besley London School of Economics There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Confident
Costas Milas's picture Costas Milas University of Liverpool There is no need to take or announce any budgetary actions to reduce the deficit or the public debt until the end of the pandemic Confident
Gino A. Gancia's picture Gino A. Gancia Queen Mary University of London HM Treasury should present a long-term plan to reduce the deficit as soon as possible, but not introduce measures to do so in the upcoming budget Confident

Question 2

Participant Answer Confidence level Comment
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Higher inflation Not confident
At current rates, the UK should certainly contemplate perpetuities and tax increase are preferable to government spending cuts. I chose inflation more a provocation and a predictive statement than as a recommended policy. (I believe the correct policy is a mix.) I expect inflation will rise in upcoming years from its current neglible levels. If my prediction is wrong, we are truly in a deep deflationary trap and the high levels of public debt are an opportunity to re-think the low inflation targets that have been the fasion of the past several decades.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Tax increases Extremely confident
We have a sustained increase in the demand for the provision of public goods. If they take up a larger share of income, then I am afraid there is little alternative to increasing taxes (by which I mean revenues relative to income) by a similar amount. Given low borrowing rates though there is no immediate need, by which I mean this year or next. Once we can be sure that lockdowns are going to re-emerge (i.e. this "war" is over) we can think about how to pay for it.
Martin Ellison's picture Martin Ellison University of Oxford None of the above, other, or no opinion Very confident
None of the options is anywhere near a silver bullet. Tax increases and public spending cuts are likely to damage the economy, at least in the recovery phase. The call for inflation coupled with fiscal repression is superficially attractive but my research on managing the UK National Debt (with Andrew Scott, forthcoming in American Economic Journal: Macroeconomics) suggests this is unlikely to be successful. Whilst it is true that inflation reduced the debt to GDP ratio by 137.3 percentage points after WWII, that was almost exactly offset by nominal interest payments pushing up the debt to GDP ratio by 139.2 over the same period. The real interest rate on the national debt was therefore almost zero (thanks to financial repression, otherwise maybe it would have been +2%) but it was far from being negative. To put it simply, with inflation and financial repression we can more or less stand still on the debt to GDP ratio, but we will not reduce the debt by much. The problem is that nominal rates rise with inflation, so any refinancing of debt becomes more expensive and gains are reduced. Consols are similarly unlikely to work, since if they are issued with the express aim of inflating them away in the future then investors will demand hefty inflation risk premia. This leaves GDP growth as the best and probably only medicine for substantially reducing deficits and debts. BTW, we no longer have consols in the UK so I don't know what the current yields are in the text.
Andrew Mountford's picture Andrew Mountford Royal Holloway Tax increases Very confident
The UK should fund the necessary public investment program with the introduction of a significant land and property tax. In the short term the UK clearly needs to invest in the productive capacity of the economy (human capital stock, public capital stock, environmental sustainability). The borrowing this entails should be backed by the value of the assets generated by this investment. If the investments are productive they should lead to a rise in productivity of the UK and so a rise in the value of wealth in the UK. Thus a natural way of financing the necessary inverstment would be to tax the beneficiaries of this investment with a tax on all land and property in the UK.(i.e. assets which benefit from the investment but which cannot be moved to avoid taxation). The ONS estimates the value of land and assets-over-land to be over £5Trillion compared to a GDP of c£2Trillion. Thus a 1% tax pa would be worth 2.5% of GDP pa. Such a tax wouldn't need to be collected immediately. It could be collected when the land is sold or transfered, the tax claim accumulating each year as a government asset. After 50 years of no-sale or transfer the state would have the right as majority shareholder to sell the land/property on the open market (with appropriate safeguards to ensure that owners who had been continuously living in the property for 50 years wouldn't be evicted). Would the tax cause land values to crash? If the public investment is productive then it shouldn't but even if they fall by 50% the tax could still back a large spending program. Plus a property price fall should cause a rise in disposable income of the younger generation which may also lead to increased growth and investment which would be equilibriating. Thus in short the UK should fund the necessary investment program by borrowing backed by the introduction of a significant land and property tax.
Kevin Hjortshøj O'Rourke's picture Kevin Hjortshøj... Oxford University None of the above, other, or no opinion Confident
Corner solutions are typically inefficient and I suppose that a mix of strategies will be optimal.
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Tax increases Confident
Chryssi Giannitsarou's picture Chryssi Giannitsarou University of Cambridge, Faculty of Economics Perpetuities Not confident
Adding to this, I believe a balanced combination of higher inflation with perpetuities would probably work best.
Elias Papaioannou's picture Elias Papaioannou London Business School Higher inflation Confident
Morten Ravn's picture Morten Ravn University College London None of the above, other, or no opinion Not confident
I do not think that this can be answered unconditionally. We need to see how the crisis pans out. In principle, the optimal policy would be to issue debt now and then tax finance the increase in debt (including inflation tax) in present value terms once the crisis is over. But the shock is so large that it would be better to think about contingent policies in case debt dynamics are worse than anticipated.
Nicholas Oulton's picture Nicholas Oulton London School of Economics Perpetuities Confident
The support measures the government has introduced aim to support consumption. Financing by tax increases or expenditure cuts would be self-contradictory. Therefore they should be financed initially by borrowing. The cheapest way to borrow seems to be via consols. At some future date consideration should be given to redeeming the consols via if necessary tax increases.
Tony Yates's picture Tony Yates University of Birmingham Tax increases Confident
I'd have preferred an option to say 'tax increases and public spending cuts'. Obviously many of the support measures will fade as the pandemic passes [presuming it does]. I wrote 'tax increases' to signal that in the longer term a larger and more resilient state is likely to be needed to put us in a better position to fight future pandemics, and also to redress some fo the regressive aspects of them [eg higher pay for teaches/healthworkers, more and better quality social housing].
Michael McMahon's picture Michael McMahon University of Oxford None of the above, other, or no opinion Very confident
While the reality will potentially involve, to different degrees, aspects of all of these, the ideal would be a situation in which the economy can grow its way out of the debt. This will raise the amount of tax and lower spending even if the policies remain unchanged and thus lower the deficit. And by raising the denominator, the debt and deficit ratios will look even more favourable. Of course, engineering growth is hard; especially as the economy may be faced with structural changes to how (or even if) certain sector operate. But it would provide the least painful and hopefully most sustainable way out of the increased debt.
Thorsten Beck's picture Thorsten Beck Cass Business School Perpetuities Very confident
I think a mix of policies is needed, but critical is transparency and accountability. I am therefore less confident in a central bank-focused with low interest rates and financial repression, but would prefer fiscal actions legitimised by democratically elected parliaments. This does NOT mean that central banks do not have a clear role in supporting fiscal policy actions, but they should not take the lead, as it would further undermine their political standing and thus their independence. I do not see public spending cuts as a viable way forward - another decade of austerity and there won't be much left of democratic support in this country (or in large parts of Europe). A mix of consoles and tax rises seem the most promising way forward). Tax rises should address inequities across income strata (e.g., self-employment NIC) but also across generations (e.g., triple lock). A wealth tax should be discussed, but I see this as very difficult, both in assessment and in political feasibility. But is should be explored - in crisis times, reforms become possible that no one before thought feasible. Consoles are an important and maybe primary tool forward, as they spread the costs across generations.
Wendy Carlin's picture Wendy Carlin University College London None of the above, other, or no opinion Confident
No single measure will be appropriate and it is too early to have a good understanding of the macroeconomic conditions in the post-COVID-19 years (especially what the longer term growth rate and real interest rate are likely to be). Policy instruments will also be directed toward other targets such as climate objectives so it does not make much sense to pick one out for 'debt reduction'.
Wouter Den Haan's picture Wouter Den Haan London School of Economics Tax increases Confident
I am sure it will have to be a combination of the set listed, but I chose tax increases because after so many years of austerity we should be careful with further erosion of government services (the cost of which has become very clear during the pandemic)
Roger Farmer's picture Roger Farmer University of Warwick Perpetuities Confident
Concern for high debt levels (as opposed to high deficits) is overblown.
Paul De Grauwe's picture Paul De Grauwe London School of Economics Higher inflation Confident
David Cobham's picture David Cobham Heriot Watt University None of the above, other, or no opinion Confident
The list of options omits economic growth, which raises tax revenue without raising tax rates, and raises GDP as the denominator. The priority should be to get a resumption of growth, and if that involves a little bit more inflation, fine. A lot of economic research, from the IMF and the OECD as well as academic economists, has shown the folly of austerity policies in response to the financial crisis, we surely do not need to go up that cul-de-sac again.
David Miles's picture David Miles Imperial College None of the above, other, or no opinion Confident
The best way is to do so gradually (bond markets permitting) and let economic growth do its work. Should real interest rates on gilts remain at negative levels it will not take much growth to bring D/GDP down.
Ricardo Reis's picture Ricardo Reis London School of Economics None of the above, other, or no opinion Very confident
High inflation will very likely fail at inflating the debt (https://ideas.repec.org/p/cpr/ceprdp/10078.html) and in itself produces insignificant revenues (http://personal.lse.ac.uk/reisr/papers/19-HofCB.pdf). In turn, perpetuities must still be paid for. So, probably the answer is a mix of public spending cuts, higher taxes, and financial repression. But, which mix depends on the country and on the future itself, so there is no best way that the question asks for.
Angus Armstrong's picture Angus Armstrong National Institute of Economic and Social Research Higher inflation Very confident
Targets and rules have become immutable, and now part of the problem in complex system.
Kate Barker's picture Kate Barker British Coal Staff Superannuation Scheme Tax increases Confident
It is very hard to see how the aftermath of this crisis can maintain adequate public spending without some tax increases. There is a high risk that the better-off will continue to save more - taxing in order to support demand may be important - and in the longer run part of the deficit reduction.
Linda Yueh's picture Linda Yueh London Business School None of the above, other, or no opinion Not confident
Investment in tech, green transition, etc to support economic growth should be part of the mix of policies.
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Perpetuities Very confident
Perpetuities, provided they were at a low rate of interest, would prevent the need for fiscal tightening. This would benefit the economy most as it struggles to recover. As with the consoles issued to pay for the Napoleonic war, governments could redeem the debt if interest payments were proving too costly. An alternative is long term debt. This has similar benefits. Over time inflation would erode the debt burden and act as a tax. Bond holders would then, in effect, be financing the current large, but temporary, fiscal deficit. This seems the optimal inter-temporal solution.
Patrick Minford's picture Patrick Minford Cardiff Business School Perpetuities Extremely confident
As noted above, the government should issue debt at the longest possible maturities given current long term interest rates. Perpetuities would be ideal vehicles for this maturity lengthening. By keeping the debt interest cost as low as 0.4%, if that can be achieved in the sale of debt outside the public sector, then the future taxpayer cost will be minimised. There will then be no need for policies of inflation for example to devalue the debt. Instead fiscal policy can be addressed to the growth needs of the economy, including tax reform; also to eliminating the zero lower bound and restoring normal savings markets and returns, together with monetary normalisation.
John VanReenen's picture John VanReenen London School of Economics Tax increases Confident
Panicos Demetriades's picture Panicos Demetriades University of Leicester Perpetuities Extremely confident
Monetary financing need not be inflationary in the current circumstances, so that’s another option I could have chosen if it was available! As the government can continue to borrow at favourable terms, perpetuities is a very good option. Any attempt to use fiscal policy Even in the future would backfire as it could derail the recovery as households and firms reduce spending in anticipation of future tax hikes or spending cuts. Consols or perpetuities offer the best alternative to monetary financing.
Lucio Sarno's picture Lucio Sarno Cass Business School Tax increases Very confident
Costas Milas's picture Costas Milas University of Liverpool Perpetuities Not confident
Gino A. Gancia's picture Gino A. Gancia Queen Mary University of London Tax increases Confident