Michael McMahon's picture
Affiliation: 
University of Oxford
Credentials: 
Professor of Economics

Voting history

Will COVID-19 Cause Permanent Damage to the UK Economy?

Question 2: Which aspect of the economy poses the greatest risk for a slow recovery?

Answer:
None of the above, other, or no opinion
Confidence level:
Confident
Comment:
It is a combination of many of these factors and their influence varies over different time horizons. In the near-term, post-Covid consumer demand will depend on confidence in the authorities that it is safe to return to more normal activities. If this doesn't happen, it will exacerbate pressures on firms making it more likely that firms go bankrupt and workers lose jobs at a time when it my be difficult to get jobs in similar industries/roles. This could contribute to hysteresis effects. As the recovery takes longer, and depending on policy actions to support firms and households through this, the effect of indebtedness could become an increasingly important constraint on investment and activity more generally. Such debt problems would likely spill over into the financial sector increasing the likelihood of problems there with the possibility of a damaging credit crunch as a result. Even longer term, the effect of lost human capital will likely have a more lasting effect on the economy.

Question 1: How quickly will the economy rebound (e.g. to the pre-pandemic trend) once the COVID-19 pandemic has been contained and absent major policy interventions? 

Answer:
The economy will recover within a small number (1-5) of years
Confidence level:
Confident
Comment:
While I believe that the economy will, in aggregate, recover to the pre-Covid projected path within 5 years post-containment, there will likely be some specific sectors that take much longer or are permanently affected. It is also a difficult question as I believe there will be significant policy stimulus in this period though whether such policy assistance qualifies as unusual I am not quite sure.

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:
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.

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:
Very confident
Comment:
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?).

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:
Member states themselves (no additional EU support)
Confidence level:
Confident
Comment:
I think the difficulty is that the current crisis requires quick action and there is a need to disperse funds quickly. Most of the other options, while they may be desirable economically are likely to take a long time. As such all countries need to proceed on the assumption that they will fund their relief effort themselves and undertake the necessary supports relying on the ESM and PEPP to reduce pressure on funding costs. Between the other options, it would clearly be useful to have additional support from the EU level so any that could be implemented quickly would be desirable economically (and potentially politically). Although some countries may explore monetary financing, and it may even be somewhat desirable in a one-off, independently-entered-into sense, I see the barriers to such financing as too large in the euro area.

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