Michael Wickens's picture
Affiliation: 
Cardiff Business School & University of York
Credentials: 
Professor of economics

Voting history

Post-Covid Fiscal Rules for the UK

Question 3: Which of the following variables should fiscal rules target to best improve the performance of the UK macroeconomic policy going forward.

Answer:
Public debt
Confidence level:
Extremely confident
Comment:
The only fiscal rule that is needed is that debt should be sustainable, meaning the public are willing to hold it. This entails tax financing permanent government expenditures, including debt service payments, and debt financing temporary expenditures, including investment and temporary shocks such as Covid. The sustainability of debt depends on fiscal deficits, the cost of borrowing, inflation and the rate of growth. To date, no government has shown any understanding of this.

Question 2: What impact has the sequence of fiscal rules adopted in the UK since 1997 had on the conduct of fiscal policy in the UK?

Answer:
Harmed
Confidence level:
Confident
Comment:
See answer to question 1

Question 1:  What impact has the sequence of fiscal rules adopted in the UK since 1997 had on the level of UK public debt? 

Answer:
No impact
Confidence level:
Confident
Comment:
Since 1997 UK governments have never systematically followed fiscal rules. Fiscal rules stabilised UK public debt until 2001 as the Labour government followed Conservative policies. Afterwards, Gordon Brown began to increase public expenditures and the debt-GDP ratio steadily but slowly increased. After this two crises led to the abandonment of any pretense at following fiscal rules. In 2008 the financial crisis led to the a huge explosion. Again in 2020 Covid led to a huge increase in debt. This has financed by printing money and zero interest rates. The Damacles Sword hanging over the current situation is the prospect of higher inflation, higher interest rates and higher debt service payments. This will make fiscal situation unsustainable.

ECB Monetary Policy and Catch-up Inflation

Question 2: Which of the following policies is the most desirable to meet the ECBs objective to achieve its mandate of “price stability” as you understand this term.

Answer:
Inflation targeting
Confidence level:
Confident
Comment:
The aim should be to smooth the expected future path of prices over the medium term but not to do this by sharply changing inflation in order to hit the price path and not to react to relative price changes that affect inflation in the short term. This means that targeting the price LEVEL and short term strict inflation targeting are the wrong choices.

Question 1: To what extent do you agree with the following statement? “The European Central Bank should systematically allow for inflation to exceed its target to compensate for periods of below target inflation.”

Answer:
Disagree
Confidence level:
Confident
Comment:
Average inflation targeting is like having a growth path for prices. The latter has the merit of being more transparent for the public. Average inflation targeting is very vague. The advantages of both are that they smooth interest rates, have less output volatility than strict inflation targeting and when they look further ahead. The disadvantages of both are when a sharp correction is applied and the average is backward looking. The problem for inflation targeting is separating permanent changes in inflation (bad) from relative price adjustments which impact inflation in the short term (good). The aim should be to smooth price paths over the medium term.

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