The IMF has no credibility in forecasting the UK economy

George Osborne has, in effect, already resorted to Plan B, because his policies are not working.

Yesterday, the IMF cut its 2011 growth forecast for the UK to 1.5 per cent but said that the government's economic policy was going along swimmingly. The Chancellor seemed to be really pleased about this endorsement. But Slasher didn't seem to notice that the IMF argued that the risks to their forecasts were "significant".

Sadly, the UK economy did not grow at all over the past six months. Consumer confidence has collapsed; business confidence is weakening; employment growth has slowed sharply; house prices are falling and the number of mortgage approvals is falling; business lending is down and there remain real risks of deflation, which I guess John Lipsky, acting head of the IMF, hasn't spotted. Over the weekend, 50 economists did spot the problem and wrote to the Observer about it. The Cabinet Office's ex-chief economist Jonathan Portes and Vicky Price, ex-head of the Government Economic Service, warned that the economy was slowing, as did Tim Besley and John Muellbauer, who had previously signed a letter in the Times supporting the government's now failing strategy. The new economics Nobel laureate, Chris Pissarides, who was also a signatory to the Times letter, also told me in an exclusive interview published in the New Statesman this week that his preferred action now is for a postponement of fiscal contraction. Growth is nowhere to be seen and the government has no plan to fix this.

The Chancellor's claim that his strategy was always flexible because of the use of automatic stabilisers amounted to an announcement of Plan B. As growth slows and unemployment rises, as it surely will, then the payments to unemployment benefits in particular start to rise. This is plainly an announcement that the speed at which the deficit is paid off will inevitably have to be slower than he had previously announced, because his policies are not working -- as I have frequently warned.

Plus, if, or more likely when, the economy starts declining further, the government would have to cut taxes and do more quantitative easing. Hence Vince Cable, Osborne and now the IMF have endorsed Adam Posen's and my long-held views: that there is a possiblity of a slow, Japanese-type recovery, hence the need for another round of asset purchases: ie Plan C.

I was particularly interested to look back to 6 August 2008, when the IMF also lowered its growth forecast for the UK economy.

The IMF predicted that the UK would grow by 1.4 per cent in 2008 and 1.1 per cent in 2009, down from the 1.8 per cent for 2008 and 1.7 per cent for 2009 that it predicted in of 2008. It said inflation at 3.8 per cent was higher than expected and inflation expectations were rising, even as economic activity was slowing. That, the IMF said, meant the Bank of England had little room to cut rates. It didn't exactly turn out that way. In August 2008, the IMF didn't even spot that the UK economy had entered recession in April that year. The IMF has no credibility in forecasting the UK economy.

Osborne has already turned, as the economy is slowing even before the public spending cuts hit. The government's economic strategy is in disarray, no matter which of Osborne's pals he gets to say otherwise.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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Why a Labour split may be in the interests of both sides

Divorce may be the best option, argues Nick Tyrone. 

Despite everything that is currently happening within the Labour Party - the open infighting amongst party officials, the threat of MPs being deselected, an increasingly bitter leadership contest between two people essentially standing on the same policy platform – the idea of a split is being talked down by everyone involved. The Labour Party will “come together” after the leadership election, somehow. The shared notion is that a split would be bad for everyone other than the Tories.

Allow me to play devil’s advocate. What the Corbynistas want is a Labour Party that is doctrinarily pure. However small that parliamentary party might be for the time being is irrelevant. The basic idea is to build up the membership into a mass movement that will then translate into seats in the House of Commons and eventually, government. You go from 500,000 members to a million, to two million, to five million until you have enough to win a general election.

The majority of the parliamentary Labour party meanwhile believe that properly opposing the Tories in government through conventional means, i.e. actually attacking things the Conservatives put forth in parliament, using mass media to gain public trust and then support, is the way forward. Also, that a revitalisation of social democracy is the ideology to go with as opposed to a nebulous form of socialism.

These two ways of looking at and approaching politics not only do not go together, they are diametric opposites. No wonder the infighting is so vicious; there is no middle way between Corbynism and the bulk of the PLP.

I understand that the Labour MPs do not want to give up on their party, but I don’t see how the membership is shifting in their favour any time soon. Most talk around a split understandably comes back to 1981 and the SDP very quickly yet consider this: the most defections the SDP ever achieved were 28. If there was a split now, it would probably involve the vast majority of the PLP, perhaps even 80 per cent of it – a very, very different proposition. There is also clearly a large number of people out there who want a centre-left, socially democratic, socially liberal party – and polls suggest that for whatever reason the Liberal Democrats cannot capitalise on this gap in the market. Some sort of new centre-left party with 150+ MPs and ex-Labour donors to kick it off just might.

Of course, a split could be a total disaster, at least in the short term, and allow the Tories further general election victories over the next decade. But let’s be honest here – given where we are, isn’t that going to happen anyhow? And if a split simply results in what happened in the 1980s recurring, thus eventually leading to a Labour Party capable of winning a general election again, would members of the PLP currently wondering what to do next not consider it worth it just for that?

Nick Tyrone is Chief Executive of Radix, the think tank for the radical centre.