Thorsten Beck's picture
Affiliation: 
Cass Business School
Credentials: 
Professor of Banking and Finance

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:
I think a mix of policies is needed, but critical is transparency and accountability. I am therefore less confident in a central bank-focused with low interest rates and financial repression, but would prefer fiscal actions legitimised by democratically elected parliaments. This does NOT mean that central banks do not have a clear role in supporting fiscal policy actions, but they should not take the lead, as it would further undermine their political standing and thus their independence. I do not see public spending cuts as a viable way forward - another decade of austerity and there won't be much left of democratic support in this country (or in large parts of Europe). A mix of consoles and tax rises seem the most promising way forward). Tax rises should address inequities across income strata (e.g., self-employment NIC) but also across generations (e.g., triple lock). A wealth tax should be discussed, but I see this as very difficult, both in assessment and in political feasibility. But is should be explored - in crisis times, reforms become possible that no one before thought feasible. Consoles are an important and maybe primary tool forward, as they spread the costs across generations.

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:
In the long-run, government debts have to be addressed, but doing so prematurely could be fatal for economic recovery. At this stage, it is not even clear how long the pandemic will last and how many waves there will be and what the ultimate economic cost will be. Once this has become clear, a long-term plan should be presented to address public (and private) debt!

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:
Very confident
Comment:
This is a once-in-a-generation or even once-per-century crisis, which demands special funding, which should therefore be outside the regular budget. There are also practical issues that might funding through the budget more difficult. Funding exclusively by member states would go beyond the fiscal space of several member states and might lead to a smaller budget than optimal or, alternatively, might push these countries into a sovereign debt crisis. Restructuring of debt at this stage would simply create enormous market volatility if not panic and make additional funding even more difficult. Finally, while monetary financing seems the easiest option and the path of least political resistance, it could be a long-term time bomb, as the monetary dominance would be lost, interest rates would have to stay around zero for years to come - with the mid-term risk of financial repression - and the ECB would become politically even more controversial.

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:
5-10% of GDP
Confidence level:
Very confident
Comment:
This is a global pandemic and the recession/depression resulting from the Great Lockdown is a global. Given high economic interlinkages (supply-chains, demand externalities etc.) national budgetary support within the EU has strong externalities, which implies that the sum of national efforts will be below the optimal effort. This is exacerbated by the limited fiscal space of some of the most affected countries. A large EU-wide budget can reduce this gap. It would also send a strong political signal to European citizens on solidarity and cooperation.

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:
140% of GDP (e.g. if fiscal support were trippled)
Confidence level:
Confident
Comment:
This question gets us back to the fiscal policy debate of the 2010s in the UK, where government ignored the advice of national and international "experts" in their mis-guided austerity drive. I do not think that there is a magic fixed debt threshold above which public debt in the UK with its own currency and flexible exchange rate becomes unsustainable. To the contrary, a big fiscal recovery package now can stimulate the economy and help reduce debt/GDP in long-run. It might also help reduce the shock to be expected from the UK exiting from the Single Market and Customs Union at the end of this or (more likely) next year.

Pages