IMF tells George Osborne austerity plan is failing

[ttosca]

IMF's Olivier Blanchard suggests UK needs reassessment of fiscal policy including changes to tax and public spending

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The message to George Osborne from the International Monetary Fund could scarcely have been clearer. It's time to think about a plan B.

Coming as it did on the eve of the fourth quarter growth figures, the intervention of the fund's chief economist Olivier Blanchard, was particularly ill-timed for the chancellor, but it was hardly a surprise.

The IMF has never been wildly enthusiastic about Osborne's tough austerity plan for the British economy and has been saying for at least a year that the Treasury should ease off if recovery falters. But up until now it has tended to avoid telling Osborne that his policy is failing.

No longer, it appears. "We said that if things look bad at the beginning of 2013 ? which they do ? then there should be a reassessment of fiscal policy", Blanchard said.

Fiscal policy involves changes to tax and public spending, and Blanchard noted that the chancellor has the perfect opportunity "to take stock and make adjustments" in the March budget, due in less than two months.

Three factors probably lie behind Blanchard's decision to go public with his concerns. The first is that the IMF, while supporting the need for budget deficits to be reduced, believes action should not be so aggressive as to derail growth. The second reason is that it has done some recent work on fiscal multipliers ? the knock-on effects of tax and spending changes on the wider economy ? and found them more powerful than it previously thought. The third reason, obviously, is that Osborne's forecasts of a recovery lurking just around the corner have proved totally wrong. The economy has flat-lined for the past two years and if the City is right about the fourth quarter 2012 growth figures there will be fears of a triple dip recession this winter.

The interesting question is whether Osborne will heed the IMF's advice. If he does, any loosening of policy in the budget is likely to be modest, and not just because of the political damage caused by the U-turn.

Osborne believes that any backsliding will come at a price. Looser fiscal policy will mean tighter monetary policy ? perhaps not from the Bank of England but from the financial markets in terms of higher long-term interest rates. His advisers have pointed out that the IMF believes the fiscal multipliers are weaker in open economies such as Britain than they are in more closed economies such as the US or Germany.

The chancellor's problem, though, is that long-term interest rates may go up anyway. It is not just the IMF but the credit rating agencies who are worried about the absence of growth in the UK. A credit downgrade looks likely and, given the dire state of the economy, would be merited. Britain does not feel like a country that deserves its AAA status.

As for the fiscal multipliers, it might be the case that their impact is less powerful in the UK than in the US. But austerity is still having a dampening effect on the economy, and is making it harder for the chancellor to hit his deficit reduction targets. The IMF is right. It is time to take stock. It would be a risk for the chancellor to announce tax cuts and a slower pace of spending cuts in the budget. But it will be a risk ? and probably a bigger one ? if he does nothing.

www.guardian.co.uk/business/2013/jan/24/imf-george-osborne-austerity-failing

This is the IMF who failed to predict the credit crunch and the global depression, isn't it? The IMF whose 'cure' for the Eurozone crisis is to plunge the PIIGS in to an economic meltdown, with 50% youth unemployment?

Just asking.

flatpack

Yup, this is the IMF that, like almost everyone else, missed the crisis. And that was demanding austerity. But they've finally woken up and smelled the coffee.

Let's put aside the pretence that a 5% rise in public expenditure over the last 2 years is a 'cut' or 'austerity'.

Let's also imagine that the IMF doesn't have a track record of utter wrongness.

Where are we going to get the money from to spend our way out of recession, given that we're already £3 Trillion in debt (including PFI and the pensions deficits) and already running a 20% deficit year-on-year?

Set against an environment where the German economy is only forecast to increase by 1% in 2013, the USA by just over 2% and even the mighty China has revised down to something approaching 8%... are we actually doing that badly? Employment may not be stellar but it has been rising a little in the last few quarters. Public spending has gone up a little. We may be treading water but it's preferable to drowning. I'd personally like to see some capital projects being undertaken but I don't think we should plunge ourselves back into the mire of excessive current spending just to please the IMF.

flatpack, it is indeed a cut. The government has cut spending on all sorts of useful things and poured money into the costs of fucking up - recession and unemployment, lower tax receipts and business failure.

A government could choose to spend money wisely, investing in the economy and policies that benefit society. Or they could choose to strangle the economy, punish the weakest and make life worse. Guess which side Osborne is on?

edam

flatpack, it is indeed a cut. The government has cut spending on all sorts of useful things and poured money into the costs of fucking up - recession and unemployment, lower tax receipts and business failure.

Only in Guardianworld is an increase in spending a cut.

A government could choose to spend money wisely, investing in the economy and policies that benefit society. Or they could choose to strangle the economy, punish the weakest and make life worse. Guess which side Osborne is on?

His policies are largely identical to Brown's, but I bet you voted Labour.

His policies are not at all like Brown's. He poured scorn on Brown's plans, claiming the Tories could eliminate the deficit in one parliament. Guess what, he's had to admit he was 100% wrong.

Cuts in spending are cuts in spending whether or not the overall total goes up. Ask anyone who relies on social care. The overall total is going up because the government has wasted money on killing the economy and lowering tax receipts, so has to borrow more. Entirely predictable.

flatpack-

Let's put aside the pretence that a 5% rise in public expenditure over the last 2 years is a 'cut' or 'austerity'.

Do you mean a 5% rise in the deficit or 5% rise in spending? Can you show me the figures, and how this money is being spent?

Let's also imagine that the IMF doesn't have a track record of utter wrongness.

It does, usually by recommending countries adopt austerity measures. This usually results in wrecking the economy. It's interesting now that even the IMF says that the austerity measures are doing harm.

Where are we going to get the money from to spend our way out of recession,

By borrowing, since we can - for the moment - borrow at very low interest rates. If the economy continues to free fall, this will change.

given that we're already £3 Trillion in debt (including PFI and the pensions deficits) and already running a 20% deficit year-on-year?

Did you just make up these figures on the spot? Where did you get £3 Trillion in debt. Sorry, there is no 'pension deficit'. It is misleading to include pensions as part of the deficit. Pensions are a promise of the govt. to pay out in the future. They a) are negotiable b) don't accumulate interest c) must be placed in the context of a potentially entirely different economic environment 10-20 years down the line.

The deficit is not 20%. It's around 8-9% percent.

When austerity causes an increase in the deficit and debt because of low growth, low tax receipts, and higher welfare payments, the answer is not to increase austerity and cause more harm. The answer is to stimulate growth.

Will you still be arguing for more bloodletting when the UK loses its AAA rating and has a triple-dip recession?

ttosca

flatpack-

Here we go again. Vain attempts to explain basic numeracy to you.

Do you mean a 5% rise in the deficit or 5% rise in spending?

Spending.

Can you show me the figures, and how this money is being spent?

Yes.

It does, usually by recommending countries adopt austerity measures. This usually results in wrecking the economy. It's interesting now that even the IMF says that the austerity measures are doing harm.

That does make me wonder why, if you think the IMF is 'usually' wrong, you decided to bore us all with yet another article.

By borrowing, since we can - for the moment - borrow at very low interest rates. If the economy continues to free fall, this will change.

Oh, more borrowing.

given that we're already £3 Trillion in debt (including PFI and the pensions deficits) and already running a 20% deficit year-on-year?

Did you just make up these figures on the spot? Where did you get £3 Trillion in debt.

Sorry, there is no 'pension deficit'. It is misleading to include pensions as part of the deficit.

Only by the innumerate.

Pensions are a promise of the govt. to pay out in the future. They a) are negotiable b) don't accumulate interest c) must be placed in the context of a potentially entirely different economic environment 10-20 years down the line.

That's the very definition of a Ponzi scheme. Hardly a model of fiscal probity, but you never are about anything except spending money.

The deficit is not 20%. It's around 8-9% percent.

It is, my mistake, I was typing fast and had a baby under one arm.

When austerity causes an increase in the deficit and debt because of low growth, low tax receipts, and higher welfare payments, the answer is not to increase austerity and cause more harm. The answer is to stimulate growth.

If austerity was causing those things, you might have an argument. It isn't. Rampant welfarism and the taxation to pay for it is causing those issues.

Will you still be arguing for more bloodletting when the UK loses its AAA rating and has a triple-dip recession?

It would be nice to see some actual bloodletting, since as I have already pointed out (and shown my sources), there hasn't been any.

The UK will lose its AAA rating (not that it means anything since the agencies are discredited), probably this year, and the depression (not recession) will continue for at least the next three years. If (as I suspect it will) the Eurozone collapses, it'll be another five years, not three.

flatpack-

Do you mean a 5% rise in the deficit or 5% rise in spending?

Spending.

Can you show me the figures, and how this money is being spent?

Yes.

Did you fail to account for spending as percent of GDP? If you look at this chart, from the same source:

www.ukpublicspending.co.uk/spending_chart_2000_2015UKp_12c1li011mcn_F0t_UK_Public_Spending_As_Percent_Of_GDP

You will see that spending increased from 2000 to 2008, when it jumped (due to the financial crisis and recession). It peaked at 2010, and has declined since.

If we look at the figures again based on spending relative to inflation, from 2010 to 2012:

www.guardian.co.uk/news/datablog/2012/dec/04/government-spending-department-2011-12#lose

We see that there is an overall slight decrease in spending. But that's not really the important issue. What is important is how money is being spent.

The biggest winners (as percentage increase) according to that list, are the House of Commons, the House of Lords, Pensions, the Electoral Commission, UK Sport, and Visit Britain. At the same time, many public services have seen a real term cut.

It does, usually by recommending countries adopt austerity measures. This usually results in wrecking the economy. It's interesting now that even the IMF says that the austerity measures are doing harm.

That does make me wonder why, if you think the IMF is 'usually' wrong, you decided to bore us all with yet another article.

Yeah, reading politics news in a politics forums is, like, so boring.

It's not just the IMF which has said the austerity measures are cutting off recovery. I'm trying to show the austerity fetishists that austerity is doing more harm than good.

Pensions are a promise of the govt. to pay out in the future. They a) are negotiable b) don't accumulate interest c) must be placed in the context of a potentially entirely different economic environment 10-20 years down the line.

That's the very definition of a Ponzi scheme. Hardly a model of fiscal probity, but you never are about anything except spending money.

No, not really. Pensions aren't a Ponzi scheme, and the 'Pensions deficit' doesn't have to be all paid out at once. I agree that the pension bill is high. Ironically, it's one of the few things this goverment refuses to touch, because 90% of Tory scum voters are pensioners, and without their support, they have no chance of ever carrying a majority.

The deficit is not 20%. It's around 8-9% percent.

It is, my mistake, I was typing fast and had a baby under one arm.

OK, no problem.

When austerity causes an increase in the deficit and debt because of low growth, low tax receipts, and higher welfare payments, the answer is not to increase austerity and cause more harm. The answer is to stimulate growth.

If austerity was causing those things, you might have an argument. It isn't. Rampant welfarism and the taxation to pay for it is causing those issues.

Austerity is causing those things. We're not experiencing a public spending crisis. The deficit jumped over 8 points immediately following the financial crash, which caused the recession, which caused a loss of tax receipts. Naturally, if your income goes down, your deficit will go up. The deficit was just below 3% before the crisis.

As I have shown before, UK public spending is not extreme or particularly high compared with other EU countries. It is about average.

Since the financial crisis and depression of 2008, on the other hand, in general, those countries which have adopted harsh austerity measures have performed worse than average and those which have sought to stimulate the economy and create jobs and growth have performed better. Now the UK is performing poor relative to countries like the USA which have not gone down the austerity route.

It would be nice to see some actual bloodletting, since as I have already pointed out (and shown my sources), there hasn't been any.

It would be nice for you, naturally, since you're a small-state, small-spending, low-tax ideologue. It won't be so nice for families who rely on the state for essential public services like health, education, and police services.

The UK will lose its AAA rating (not that it means anything since the agencies are discredited), probably this year, and the depression (not recession) will continue for at least the next three years. If (as I suspect it will) the Eurozone collapses, it'll be another five years, not three.

Perhaps. So at this point, if you were rational, you would conclude that doing the same thing which you've been doing for the past 2 1/2 years is not a wise thing to do. The rational person would conclude that what we're doing isn't working, and that it's time to change course.

Anyway, I'm sure they'll be riots in the streets soon, so they'll be change for sure before 2015.

The recent tax cuts saw highest earners gaining an average £100,000 a year. Give a millionaire £100K and it's a yacht in monte carlo. Give an average family an extra £50 a week and they'll spend it. Which one supports growth in Britain?

Unemployment figures are falling because they are being fiddled. Sanctioned claimants are not counted, workfare participants are deemed to be employed! Its blatant lies.

Spending has gone up because so many are out of work but the unemployment figures arent telling the true story.

Meant to add in my post that a family with an extra £50 a week will spend it in our home economy (thus creating the upward 'domino effect').

Recent figures on unemployment show claims were up a further 70,000 this quarter.

Government is still borrowing, more than under the previous labour government, to support the dwindling economy.

Labour, if re-elected, would of course borrow. But they would reinvest the money into capital projects to promote employment - this of course would lead to more local spending so increased revenue for communities and of course more VAT for the coffers, greater tax income, less people reliant on the welfare state for unemployment benefits and much greater morale all round.

I fail to see why the current government are unable to see this. Their policy is that if they give it to the rich, it will somehow trickle down into the lower echelons of society. But it's just not happening!

Businesses are holding onto their money, not reinvesting which is why we have the unusual case of share prices holding while the rest of the economy goes to the wall.

Austerity doesn't work.

I fail to see why the current government are unable to see this. Their policy is that if they give it to the rich, it will somehow trickle down into the lower echelons of society. But it's just not happening!

Either they are blinded by their own ideology and still believe that trickle-down neo-liberalism works, despite decades of evidence, or they just don't care - no doubt some of them are more concerned with reducing the size of the state and reducing taxation than the general state of the economy.

After all, when you're an independently wealthy millionaire, you're not subject to the whims of the economy.

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