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

Voting history

Lockdowns and UK Economic Performance

Question 1: How much of the decline in GDP experienced to date would have been avoided in the absence of any lockdown measures or other policy interventions (such as fiscal support)?

Answer:
GDP would have been lower absent lockdowns
Confidence level:
Very confident
Comment:
The experience across countries suggests that there is not really a trade-off between public health measures and economic growth, so I would there would have been little if no difference in the GDP drop compared to the lockdowns. First, research suggests that people react with lower demand to the public health crisis and this reaction would have been stronger if the pandemic had exploded without any control. Second, an unlimited spread in the pandemic would have led to serious disruption in basic economic services (e.g., transportation) due to labour shortages, with wider negative repercussions for the economy. Not having any lockdowns and - additionally - not any economic policy measures would have exacerbated the economic outlook further. Widespread losses for corporations (with consequent insolvencies) and households would have resulted in further reductions in aggregate demand and in financial sector distress, adding another shock to the economy.

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:
Consumer demand
Confidence level:
Confident
Comment:
There will be many risks for recovery but in the short- to medium-term (next two years) I would say that depressed consumer demand and precautionary savings poses the highest risk. A close second will be debt overhang, corporate failures and possibly bank failures, which will require decisive policy action to allow for reallocation of resources within the economy, thus helping recovery.

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:
Not confident
Comment:
It is very hard to predict how the economic recovery will play out in the coming months and years, following containment. There will certainly be some scars, as there will be the need for reallocation - many businesses in hospitality and tourism will not survive - this reallocation will result in a certain level of unemployment, but possibly also capital retained in zombie firms. Finally, the uncertainty on Brexit and the future relationship between UK and EU as well as other trading partners makes not only predictability of recovery very uncertain but will also undermine the recovery itself.

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!

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