Michael McMahon's picture
University of Oxford
Professor of Economics

Voting history

Prospects for Economic Growth in the UK April 2014

Question 1

The long period of slow or negative growth might imply that there is a substantial output gap in the UK economy.  Do you agree that there is currently a larger output gap than the OBR estimate to the extent that the shortfall in output relative to capacity is 3% or greater?  

Neither agree nor disagree
Confidence level:
Not confident
I tend to be pessimistic that, at least in the short- to medium-run, the UK's supply potential has been reduced as a result of the financial crisis. Together with persistence of the 8% drop in GDP from 2008-2009, I have expected weaker growth to persist for some years, and still expect growth to be weaker in the near term than in the period from 1995-2007. However, I remain very uncertain about the true size of the output gap and my best guess would probably be a very wide range of 2-4% which straddles the 3% value in the question.

Responsible long-term fiscal policy (pilot survey)

Second question:

To help ensure that advanced country governments pursue responsible fiscal policies, countries should adopt formal rules for limiting structural deficits, which are supported by primary legislation or constitutional reform.

Confidence level:
I am in favour of rules governing fiscal policy limits so long as those rules ensure that elected politicians can select the balance and allocation of spending and tax within those limits. Any legislation must set rules that take account of different country situations, and expected future liabilities; this means that structural deficit limits may need to be time-varying. And it is vital to have an appropriate system for adjusting appropriately for cyclical effects; I remember that an attempt by the European Commission to cyclically-adjust EU fiscal deficits failed because countries could not all agree on a single method to cyclically-adjust the deficit.

First question:

To help ensure that advanced country governments have sufficient flexibility to respond to future crises, it is important that finance ministries aim for a ratio of public debt to GDP that is substantially less than 60% in normal times.

Confidence level:
Very confident
I do not agree that 60% or some other lower value is somehow a magic number that, if adhered to, will provide the scope for a fiscal response in the event of another crisis or even a milder recession. The application of one-size-fits-all optimal level of debt does not seem like good advice to me. We know, in an accounting sense, that debt dynamics (in terms of debt as a percentage of GDP) are affected by nominal GDP growth which differs substantially across countries. Countries face very different future claims from health and pension spending, and moreover governments in different countries have different levels of assets. It may be that certain countries need to reduce debt to levels substantially below 60%, but also there are some countries who could, and in fact should, allow debt to be higher than 60% in order to facilitate investment in the near term.