Jagjit Chadha's picture
Affiliation: 
National Institute of Economic and Social Research
Credentials: 
Professor of economics

Voting history

Fiscal Rules in the European Monetary Union

Proposition 1: The existing fiscal rules for European Monetary Union members require revision.

Answer:
Strongly agree
Confidence level:
Extremely confident
Comment:
The fiscal rules have their origin in targets for debt and deficits akin to inflation targets for monetary policy. They have been more honoured in the breach the observance. And have led to sub-optimal fiscal responses to the consequences of a monetary union that is itself not an optimal currency area. This would require more not less flexibility but at the same time a credible framework. As we have learnt in the UK, politicians tend to guard their control over the public purse. A framework that allows politicians to meet the demands of their electorate but also adopt more robust revenue raising and targeted expenditure would be a for which prize it was worth fighting.

The “Spend Now, Tax Later” Budget

Question 3: Which of the following best characterizes the pace at which the budget addresses UK’s medium term fiscal challenges (deficit and debt)?

Answer:
Reduces deficits too rapidly
Confidence level:
Confident
Comment:
The OBR has a relatively optimistic short run projections with over 11% cumulative GDP growth in 2021 and 2022 but rather emaciated growth for 2022, 2023 and 2024 (1.7, 1.6, 1.7), which suggests that we may be in danger of planning somewhat of a tighter fiscal policy that we ought with a forecast of a return to a balanced current budget by 25/26. Given low costs of borrowing, we really can afford to take some time to help the economy adjust and provide more support for labour market transitions.

Question 2: To what extent will the “super deduction” aide the UK’s recovery from the Covid recession?

Answer:
Moderately
Confidence level:
Confident
Comment:
Providing an incentive to bring forward firm investment is a good idea. But it will not help start-ups or firms that are struggling from the impact of Covid and EU exit. They key objective will be to create sufficient confidence or sense of future profitability across sectors and regions, which may need somewhat more than a tax break. But it is a start.

Question 1: How will the increase in the corporate tax rate from 19% to 25% affect the UK’s international competitiveness in the medium term?

 

Answer:
Large damage
Confidence level:
Confident
Comment:
If we put on one side the complications brought about by the temporary super-deduction on investment in plant and machinery, which will tend to bring forward investment by firms showing a profit, an increase in corporate tax does not support the UK's international position on competitiveness after exit from the EU. Our own analysis at NIESR (https://www.niesr.ac.uk/sites/default/files/publications/UK%20outlook%209%20feb.pdf page 15) suggests that raising corporate taxes have larger contractionary impact on the economy that either of VAT or income taxes so the increase in the tax if permanent may not be very helpful. I suspect we need to view the higher tax rate alongside tax break for investment rather than in isolation: they form a joint strategy.

Post Covid-19 Potential Output in the Eurozone

Question 2: How much lower will the potential growth rate of GDP in the Eurozone in 2025 be due to Covid-19 relative to pre-Covid forecasts?

 

Answer:
No different
Confidence level:
Confident
Comment:
Growth will continue to be pinned down by trends and prospects for productivity. It is not clear that Covid-19, which will be ultimately be a short run shock, will significantly affect the evolution of manufacturing, market and non-market service sector productivity. We might though want to improve the measurement in these sectors.

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