Martin Ellison's picture
Affiliation: 
University of Oxford
Credentials: 
Professor 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:
None of the above, other, or no opinion
Confidence level:
Very confident
Comment:
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.

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:
Joint borrowing by member states (e.g. Coronabonds)
Confidence level:
Confident
Comment:
See above. There is no moral hazard or adverse selection problem with countries borrowing because of the Covid-19 virus, so it is important to support the weakest and help them help themselves.

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:
This is an opportunity for the EU to step up to the plate and realise its ambitions to be the primary coordinator of the European trading block. In a geographically fragmenting world where tensions and frictions are running high, it is important to cement EU. There is no moral hazard or adverse selection problem with countries borrowing because of the Covid-19 virus, so it is important to support the weakest and help them help themselves. Domestically, we are encouraged to stay at home to “protect the vulnerable” and “protect the NHS”. By analogy, the EU should also “protect the vulnerable” and “protect the institutions”, by distributing resources to countries rather than individuals. Deficit have been in the range 15-20% during times of war in many countries, so there should be no problem raising funding. If this is a 1 in 50 year crisis then we need to pay for it over 50 years, and a significant EU bond issue could help weak fiscal countries to achieve that.

Covid-19: Economic Policy Response

Question 2: Which of the following would have the second greatest impact in mitigating the economic effects of the coronavirus economic crisis in the UK?

Answer:
Government transfers to and bailouts of businesses
Confidence level:
Very confident
Comment:
In effect, we need to pause economic time until the virus passes. Extending credit to firms and workers helps to some extent but is likely to cause problems in the future when they have to cope with severe debt overhangs. Better that the whole society takes the hit now by making cash transfers funded by increasing public debt. Interest rates are very low by historical standards so debt servicing costs are minimal, and markets still appear willing to lend to the UK government. The UK budget deficit rose in excess of 20% of GDP in both World War I and II, leading to large spikes in debt, but which we were able to pay down in subsequent years through a combination of GDP growth, inflation and (some) primary surpluses. I would hence like to see much larger scale interventions than have been agreed so far. What’s the point of having a nation state with an ability to borrow large amounts of money cheaply if we don’t use that ability when there is a crisis of this type?

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

Answer:
Broad cash transfers and/or tax cuts
Confidence level:
Very confident
Comment:
The coronavirus is a huge shock to demand and supply that is persistent but likely temporary. The policy response therefore needs to focus on sustaining the economic system until the effects of the shock dissipate. It is critical that we retain the organisational capital of firms and the skills of workers, which are best guaranteed by direct cash injections to firms to guarantee their cash flow and direct cash payments to cover the salaries of workers temporarily laid off due to the virus. This is not about stimulating demand (with leisure facilities closed there’s very little for people to spend money on) but about maintaining the supply base of the economy. We have already seen productivity growth in the UK slowing since the Great Recession; productivity will collapse if government support is not forthcoming.

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