Ethan Ilzetzki's picture
Affiliation: 
London School of Economics

Voting history

COVID-19 and UK Public Finances

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

Answer:
Higher inflation
Confidence level:
Not confident
Comment:
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.

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

Answer:
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
Confidence level:
Extremely confident
Comment:
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.

The Eurozone COVID-19 Crisis: EU Policy Options

Question 2: What is the best mechanism to pay for economic support provided by and to EU member states to combat the COVID-19 crisis?

Answer:
Expanded EU budget (with possible borrowing at the EU level)
Confidence level:
Not confident
Comment:
My preferred option would be debt restructuring that leads to substantial debt reductions to the most highly indebted member states, combined with greater enforcement of deficit limits in the future. This would avoid the patchwork of having to deal with a similar situation every decade. However, the Greek debt reduction in the previous crisis indicated that debt restructuring realilstically only leads to minor reductions in the country's debt burden. Given this, the EU will need to play a far more direct role. The crisis has shown that the greatest challenges to our civilization know no borders and enhancing the EU budget will be a good precedent for the future as well.

Question 1: What is the total size of funding that you would advocate at the EU level in support of its members to weather the COVID-19 crisis this year?

 

 

Answer:
10-20% of GDP
Confidence level:
Very confident
Comment:
The magnitude of the shock is unprecedented in modern peacetime and was entirely unanticipated. Some EU member states entered the crisis with high levels of public debt and limitted fiscal space to respond to the crisis. Italian debt is on the verge of "junk bond" status even with the ECB's support. The survival of the European Union project requires meanigful action that will entail transfers from north to south. The exact magnitude will depend on whether the funding is the in the form of concessional loans or outright transfers. The sums could be substantially smaller if they are more explicitly targetted to the weakest economies in the EU, but this will be difficult to enact politically.

Covid-19: Economic Policy Response

Question 1: Which of the following would have the greatest impact in mitigating the economic effects of the coronavirus economic crisis?

Answer:
Government transfers to and bailouts of businesses
Confidence level:
Very confident
Comment:
Perfectly managed, the economic crisis could be short lived with the economy roaring back to its original condition after the health crisis is contained. Poorly managed, this short episode could have scarring effects on the economy that could last years. The latter would occur because of mass unemployment and business failure due to temporary closures of large portions of the economy. Some combination of transfers to (smaller) businesses and credit to (larger) businesses is the most direct way to keep them alive. I would make the transfers conditional on retaining staff at pre-crisis levels, which would also contain the damage to labour markets. Unlike in regular recessions, broad-based fiscal policy (tax cuts or transfers) or monetary policy (QE) won't be effective. Parts of the economy are shut down, so that consumption isn't possible or discouraged for health reasons. A visit to your local supermarket will illustrate that there is no lack of consumer spending in other parts of the economy. The multiplier effect of broad based policies will be very limited at this point and more targeted policies are necessary for this very unusual recession we are approaching. UK government debt was above 80% of GDP at the onset of the crisis. The government’s fiscal package combined with the slowdown of the UK economy may bring public debt to over 100% of GDP. The third question asks you about deficit concerns arising from the size of the fiscal responses currently considered.

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