Michael Wickens's picture
Affiliation: 
Cardiff Business School & University of York
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:
Perpetuities
Confidence level:
Very confident
Comment:
Perpetuities, provided they were at a low rate of interest, would prevent the need for fiscal tightening. This would benefit the economy most as it struggles to recover. As with the consoles issued to pay for the Napoleonic war, governments could redeem the debt if interest payments were proving too costly. An alternative is long term debt. This has similar benefits. Over time inflation would erode the debt burden and act as a tax. Bond holders would then, in effect, be financing the current large, but temporary, fiscal deficit. This seems the optimal inter-temporal solution.

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:
Fiscal policy should aim to stimulate the economy until the lockdown is over and not depress it by raising taxes. Government expenditures will return to near normal once the current support for businesses and employees ceases. They need not be cut otherwise. I could make an exception for HS2.

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:
Other or no opinion
Confidence level:
Very confident
Comment:
I vote "other" because, apart from rejecting the first option, I believe that any of the others could work. In general, as covid-19 is a one-off fiscal problem it should be financed either by bonds or money. In principle a temporary increase in taxes could also be used. Bonds would be financed by the current generation and money would be a temporary inflation tax. General taxation is only appropriate for permanent increases in fiscal deficits. However, in the EU this solution would be difficult to implement due to the single currency. Countries such as Germany and The Netherlands can use bond finance but countries like Italy, Greece and Spain would find this very expensive due to their already high levels of debt. Currently money financing is ruled out for the ECB as they are not allowed to buy government debt directly. As direct fiscal transfers are too small and face strong opposition by the countries that expect to have to pay, and higher temporary taxes would be politically difficult, this only leaves bond financing. This could be done by reducing the cost of debt by debt write-offs and then issuing more debt or by risk sharing through coronabonds. Both face the objection that they are a form of fiscal transfer. In principle any of these or a combination could work. The choice of which to use will be political and not economic. The founding fathers of the EU might take some satisfaction from the situation as whichever solution is adopted it will hasten their ultimate objective of political union. Participants have admitted that monetary union was introduced before it was sensible in order to hasten political union. Now fiscal transfers will break the log jam of fiscal union and be a further push to political union.

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:
No opinion
Confidence level:
Confident
Comment:
This is not the right question. It presupposes that direct fiscal funding is required which it is not. I explain my reasoning in the next question.

Covid-19: Economic Policy Response

Question 3: Which would be the maximal public debt you would be willing to tolerate if used effectively (as in your answers to 1 and 2 above) to support an economic recovery?

Answer:
100% of GDP: Current policy
Confidence level:
Confident
Comment:
For a short time and if tax revenues return after the epidemic then it doesn't really matter about debt levels. This is an occasion where the current generation can borrow on future generations as they will shortly be the generation that also pays off debt.

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