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The Importance of Elections for UK Economic Activity

Saturday, March 28, 2015

Question 1: Do you agree that the austerity policies of the coalition government have had a positive effect on aggregate economic activity (employment and GDP) in the UK?

Question 2: Do you agree that the outcome of the general election will have non-trivial consequences for aggregate economic activity (employment and GDP)?

 

 

 

 

 

 

 

 

 

 

 

Summary

In the week before the dissolution of Parliament, the Centre for Macroeconomics asked its panel of experts about the effects of governments on aggregate economic activity.

The great majority of respondents disagree with the proposition that the coalition government’s austerity policies have had a positive effect on aggregate economic activity. And an overwhelming majority of respondents agree that the outcome of the general election (assuming a stable government is formed) will have non-trivial consequences for economic activity.

The policies of the coalition government

Question 1: Do you agree that the austerity policies of the coalition government have had a positive effect on aggregate economic activity (employment and GDP) in the UK?

Summary of responses

The great majority disagree or disagree strongly with the proposition. Of the 50 economists in the survey, 33 responded: two thirds disagree or strongly disagree that coalition policies have had a positive effect on aggregate economic activity. To be precise, no one strongly agrees, 15% agree, 18% neither agree nor disagree, 33% disagree and 33% strongly disagree. Ignoring those who sat on the fence, 19% agree and 81% disagree with the proposition. This ratio is unaffected by confidence weighting.

Many of the respondents begin by noting that it is far from clear what the counterfactual is and that austerity policies were significantly loosened in the second half of the term.

Nevertheless, the clear majority of our respondents disagree or strongly disagree with the proposition. Simon Wren-Lewis (Oxford) even goes so far as to ask whether ‘this is a joke’ before pointing out that by using numbers from the Office for Budget Responsibility (OBR), one can ‘derive a lowest estimate’ for the cumulative loss in activity of 5% of GDP (or £1,500 per capita) and ‘a best guess could be nearer to 10% of GDP.’ Ethan Ilzetzki (London School of Economics, LSE) strongly disagrees, noting that ‘interest rates were at historical low levels and there was no indication that the debt burden was a drag on growth.’ John Van Reenen (LSE) also strongly disagrees, although he says that austerity was correctly relaxed after 2011-12 as the ‘nascent recovery stuttered.’ He and Tony Yates (Bristol) both mention the zero lower bound on interest rates as an argument for less austerity.

Some of those who neither agree nor disagree say that austerity may have had an initial positive effect in preventing a loss in confidence in UK economic policy. Giancarlo Corsetti (Cambridge) notes that a key achievement had been to insulate the country from ‘the most damaging type of financial crisis – the loss of market confidence on “sovereign signature”.’ Sir Charles Bean (LSE) makes a similar point: that the motivation for consolidation was to ‘reduce the likelihood of a loss of market confidence… which, had it occurred... would have necessitated a much larger consolidation.’ John Driffill (Birkbeck) disagrees with the proposition and suggests that ‘markets might have found less austere policies equally credible.’

Of those who agree that there has been a positive effect on activity, Nick Oulton (LSE) suggests that austerity has been ‘greatly exaggerated’ as real current expenditure by general government has been higher in each year between 2010 and 2013 and general government investment is higher than it was in most of the years under the preceding government. Patrick Minford (Cardiff) also agrees, noting that the coalition has set a definite direction towards deficit reduction ‘without moving so rapidly to destabilise the economy.’ Jagjit Chadha (Kent) suggests that the coalition’s fiscal policies are better thought of as ‘sound money’ as deficits have continued to fall.

After the general election, assuming a stable government is formed (perhaps in coalition)

Question 2: Do you agree that the outcome of the general election will have non-trivial consequences for aggregate economic activity (employment and GDP)?

Summary of responses

An overwhelming majority of respondents agree or strongly agree that the outcome of the general election will have non-trivial consequences for aggregate economic activity. Of the 33 economists who expressed a view, 77% either agree or strongly agree with the proposition, and excluding those who were neither agree nor disagree, the majority rises to 93%. If the responses are weighted by confidence, and excluding those who sat on the fence, the share of those who agree or strongly agree edges higher to 94%.

Of the many respondents who agree or strongly agree with the proposition, many cite differences in fiscal policy as the main reason. David Bell (Stirling) agrees, suggesting that the difference would come down to ‘which party is making the right judgement call on the speed of deficit reduction.’ Michael McMahon (Warwick) agrees, saying that the election would ‘determine the balance between tax increases and expenditure cuts. Morten Ravn (University College London, UCL) also agrees, noting that the difference between the main parties looks likely to be tax rises versus spending cuts: ‘there is ample empirical evidence that shows that differences... matter for the economy.’ Christopher Martin (Bath) strongly agrees and estimates that the difference in spending plans is ‘about £40 billion per year’ and that even most hard-core anti-Keynesian would argue this has ‘non-trivial consequences.’

Two survey respondents disagree that the outcome will have non-trivial consequences for activity, but neither offers an explanation. Of those who neither agree nor disagree, Martin Ellison (Oxford) notes that the difference between party platforms is not huge in respect to their commitment to austerity and Ethan Ilzetzki (LSE) suggests that ‘no party has put forth proposals that are a magic bullet for the UK's long-term economic challenges.’ Charles Nolan (Glasgow) suggests that it is very difficult to know what the major parties are really planning and that ‘the lack of information is worrisome.’

It is notable that Wouter Den Haan (LSE), Ethan Ilzetzki (LSE), John Driffill (Birkbeck), Simon Wren-Lewis (Oxford), David Cobham (Heriot-Watt) and Costas Milas (Liverpool) all highlight important economic consequences that may arise from an EU referendum in the next Parliament.

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