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Austerity is a task for another day, IMF tells George Osborne Austerity is a task for another day, IMF tells George Osborne
(4 months later)
Hit the austerity pause button. Invest more in social housing, schools and road repairs. Growth is more important in the short term than deficit reduction. Couched in suitably polite language, that was the uncomfortable message from the International Monetary Fund to George Osborne .Hit the austerity pause button. Invest more in social housing, schools and road repairs. Growth is more important in the short term than deficit reduction. Couched in suitably polite language, that was the uncomfortable message from the International Monetary Fund to George Osborne .
The chancellor could take some comfort from the fact that the fund was rather more diplomatic about his economic strategy than it was in Washington a month ago, but not all that much. For the past couple of weeks, the government has done its utmost to persuade the IMF that Britain should stick to its current budgetary course. Osborne has tried. The chief secretary Danny Alexander has tried. Sir Mervyn King has tried. They have all failed.The chancellor could take some comfort from the fact that the fund was rather more diplomatic about his economic strategy than it was in Washington a month ago, but not all that much. For the past couple of weeks, the government has done its utmost to persuade the IMF that Britain should stick to its current budgetary course. Osborne has tried. The chief secretary Danny Alexander has tried. Sir Mervyn King has tried. They have all failed.
After three years in which it first strongly supported Osborne's austerity programme, then had second thoughts when the economy sank into a double-dip recession, the IMF has finally had enough. It wants further fiscal tightening postponed until the economy is strong enough to take it. That is, of course, precisely what Ed Balls, the shadow chancellor, has been saying, which is why the fund's recommendations in its annual "Article IV" health check on the UK are a political problem for Osborne.After three years in which it first strongly supported Osborne's austerity programme, then had second thoughts when the economy sank into a double-dip recession, the IMF has finally had enough. It wants further fiscal tightening postponed until the economy is strong enough to take it. That is, of course, precisely what Ed Balls, the shadow chancellor, has been saying, which is why the fund's recommendations in its annual "Article IV" health check on the UK are a political problem for Osborne.
The countdown began a year ago when the fund said that the chancellor should be ready to change course if the economy weakened. Then in April, amid speculation that Britain was about to enter a triple-dip recession, the fund's chief economist, Olivier Blanchard, said it was time for Osborne to rethink plans to reduce Britain's structural budget deficit by 1% of GDP this year. The chancellor was particularly irked at suggestions that the UK was "playing with fire", pointing out that the government had already shown flexibility in its deficit reduction strategy and had introduced measures to stimulate growth.The countdown began a year ago when the fund said that the chancellor should be ready to change course if the economy weakened. Then in April, amid speculation that Britain was about to enter a triple-dip recession, the fund's chief economist, Olivier Blanchard, said it was time for Osborne to rethink plans to reduce Britain's structural budget deficit by 1% of GDP this year. The chancellor was particularly irked at suggestions that the UK was "playing with fire", pointing out that the government had already shown flexibility in its deficit reduction strategy and had introduced measures to stimulate growth.
The fund remains unconvinced. At a press conference hosted by the Treasury yesterday, its deputy managing director, David Lipton, fleshed out Blanchard's critique: the fund is unhappy about the £10bn Osborne is taking out of the economy through spending cuts and tax increases this year and wants them offset by investment in infrastructure and tax measures to help business.The fund remains unconvinced. At a press conference hosted by the Treasury yesterday, its deputy managing director, David Lipton, fleshed out Blanchard's critique: the fund is unhappy about the £10bn Osborne is taking out of the economy through spending cuts and tax increases this year and wants them offset by investment in infrastructure and tax measures to help business.
Lipton's argument is simple. Britain may have avoided a triple-dip recession, but the economy remains extremely weak and unemployment too high for comfort. While the government's determination to tackle the budget deficit back in 2010 was understandable, with the benefit of hindsight, it cut capital spending too aggressively. There are already two major headwinds facing the economy – the recession in Europe and a banking system that is repairing its balance sheets. It doesn't need Osborne to add a third with his £10bn of tax and spending measures.Lipton's argument is simple. Britain may have avoided a triple-dip recession, but the economy remains extremely weak and unemployment too high for comfort. While the government's determination to tackle the budget deficit back in 2010 was understandable, with the benefit of hindsight, it cut capital spending too aggressively. There are already two major headwinds facing the economy – the recession in Europe and a banking system that is repairing its balance sheets. It doesn't need Osborne to add a third with his £10bn of tax and spending measures.
A bit of extra spending now would not only boost demand, according to the IMF, it would also improve the long-term supply capacity of the economy. What's more, with interest rates on government debt at historic lows, it would be dirt cheap. The fund's forecast for UK growth this year currently stands at 0.7%, but it believes that could be raised to 1.2% or 1.3% if Osborne deferred his planned £10bn of tightening to another year.A bit of extra spending now would not only boost demand, according to the IMF, it would also improve the long-term supply capacity of the economy. What's more, with interest rates on government debt at historic lows, it would be dirt cheap. The fund's forecast for UK growth this year currently stands at 0.7%, but it believes that could be raised to 1.2% or 1.3% if Osborne deferred his planned £10bn of tightening to another year.
This is bog-standard Keynesian analysis. In the medium term, the IMF does think that the deficits need to be addressed, just as Keynes did. What's at issue is the timing, and the fund says now is not the time for more austerity.This is bog-standard Keynesian analysis. In the medium term, the IMF does think that the deficits need to be addressed, just as Keynes did. What's at issue is the timing, and the fund says now is not the time for more austerity.
Two questions arise from the fund's analysis. The first is how much extra Osborne would have to borrow. Lipton refused to be drawn, but it would be less than the £10bn the chancellor is taking out of the economy this year, due to so-called multiplier effects. The IMF believes that a pound spent on public investment will have more of an impact on growth than, say, a pound saved by cuts to day-to-day spending at the Home Office. On some estimates, £5bn might do the trick.Two questions arise from the fund's analysis. The first is how much extra Osborne would have to borrow. Lipton refused to be drawn, but it would be less than the £10bn the chancellor is taking out of the economy this year, due to so-called multiplier effects. The IMF believes that a pound spent on public investment will have more of an impact on growth than, say, a pound saved by cuts to day-to-day spending at the Home Office. On some estimates, £5bn might do the trick.
The second question is how the chancellor will respond. Infrastructure will be a focus for next month's spending review, the chancellor has said. But the spending review will not affect decisions until 2015-16. The IMF will be hoping for action sooner than that.The second question is how the chancellor will respond. Infrastructure will be a focus for next month's spending review, the chancellor has said. But the spending review will not affect decisions until 2015-16. The IMF will be hoping for action sooner than that.
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