On 6 June 2011, George Osborne said that he had been "vindicated" in a debate over spending cuts after the International Monetary Fund backed his austerity measures. Launching the fund's annual assessment at the Treasury, the Chancellor positively swooned over the verdict and the acting managing director of the IMF John Lipsky's support for his failing policies.
"The IMF have publicly asked themselves the question of whether it is time to adjust macroeconomic policies -- in other words, 'Is it time to change course?'" he said. "They have concluded definitively that the answer is no.''
Today's developments suggest that if there ever was any vindication, which was never credible of course, it has now fled.
To be fair to the IMF, the original report did warn that:
If the economy experiences a prolonged period of weak growth and high unemployment . . . then some combination of the following would need to be considered: (i) expanded asset purchases by the Bank of England and (ii) temporary tax cuts. Such tax cuts are faster to implement and more credibly temporary than expenditure shifts and should be targeted to investment, low-income households or job creation to increase their multipliers.
This has now happened as growth disappoints.
Today's release of growth data for the second quarter of 2011 from Europe were scarily bad with the eurozone economy growing only 0.2 per cent and there may well be worse to follow. This is the smallest increase since the recovery began in the third quarter of 2009. This is bad for UK growth -- which was also 0.2 per cent for the second quarter of 2011 -- given our dependence on exports to the slowing euro area.
Growth has slowed sharply from the 0.8 per cent increase seen in the first quarter. Growth in France and Portugal was zero, while Germany grew by only 0.1 per cent, compared with market expectations of 0.5 per cent. The Netherlands (0.1 per cent), Italy (0.3 per cent) and Spain (0.2 per cent) also showed very little growth.
As can be seen below the UK has performed badly compared to our European counterparts for whom we have complete data. Based on data for the last three quarters, which is how the table is presented, the UK ranks next to last ahead only of Portugal and tied fourth from last with Italy using data for the last four quarters, ahead of Portugal, Romania and Spain. No vindication here George, I'm afraid.
According to a Treasury spokesman, Osborne chatted with Christine Lagarde, the new managing director of the IMF, while he was on his holidays in Hollywood. I suspect Slasher wasn't too happy about what she said, given his frequent claims that the IMF, Uncle Tom Cobley and all supported his misguided and disastrous macroeconomic policy.
Writing in today's Financial Times, Lagarde argues that deficit-reduction plans must not harm growth as the austerity programme clearly is doing in the UK. She writes:
For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans. At the same time, we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow . . . What is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs.
That may sound contradictory but the two are mutually reinforcing. Decisions on future consolidation, tackling the issues that will bring sustained fiscal improvement, create space in the near term for policies that support growth and jobs. By the same token, support for growth in the near term is vital to the credibility of any agreement on consolidation. After all, who will believe that commitments to cuts are going to survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?
I could have written this.
Recall that Osborne opposed Gordon Brown's candidacy and supported Lagarde's in the job, so this is highly embarrassing.
Commenting, Ed Balls, Labour's shadow chancellor, said:
The slowdown of a number of European economies is obviously a serious cause for concern. The Managing Director of the IMF, Christine Lagarde, is right to say that "slamming on the brakes too quickly will hurt the recovery and worsen job prospects". The evidence for George Osborne's claim that Britain is a safe haven has collapsed and his dangerous complacency is being exposed. That is why the Chancellor should take heed of the IMF's latest advice. The IMF were right to warn George Osborne a few months ago that he would need to change course if the UK continued to stagnate. His decision to continue to ignore wise advice is not just complacent it is deeply reckless -- a dangerous gamble with jobs, investment and living standards, too.
Osborne's claim that his policies have succeeded because of the fall in bond yields looks like a stretch, given -- as Peter Tasker noted in the FT last week -- that no OECD country that issues its own currency is suffering from rising borrowing costs. The IMF does not support the coalition's failing economic policies. Vindicated my foot. It's time to stimulate growth and jobs.