IMF: “A plague on both your houses”

Funded stimulus will take real political leadership to pull off.

Yesterday’s IMF country report for the UK had something for everyone in the debate about fiscal policy and growth.

There were two headline conclusions. The first was that evidence from non-eurozone countries suggests that, in the UK, low Gilt yields are an indicator of weak growth prospects. As Jonathan Portes has long argued, they aren’t a market vote of confidence in the Government’s fiscal strategy. So the benefits of Plan A aren’t nearly as great as the Government likes to claim. Loosening up on Plan A would indeed raise the Government’s cost of borrowing, but only because prospects for growth in the private sector would improve. So much for Plan A fundamentalism.

So Plan B it is then? Well not quite. At the same time as challenging the benefits of Plan A, the report’s second conclusion cast doubt on the gains from easing-up on deficit reduction.

The benefits of slowing the pace of the cuts depend upon your view of how the impact of government spending on output varies with the state of the economy. Does a pound of government spending boost GDP by more when output is below its potential – or in a recession - than it does in normal times? The IMF sets out three scenarios.

First, that the timing of spending makes no difference in the long-run. Plan B would therefore be a prescription for lower-intensity pain for longer, while Plan A is more of a short, sharp shock. But in the long-run, the negative impact on the potential of the UK and its workers would be no different under either plan.

Second, it could be that each pound of spending has more impact when output is below its potential, as it is now. In this case slowing the pace of cuts would be a good idea, saving thousands of people from being permanently disadvantaged in the labour market.

Third, it might be that government spending has its greatest impact when the economy is actually shrinking, and less impact when it’s growing. If slower cuts fed through just as growth picked up, then Plan B might even be worse than Plan A on this view.

So for Plan B to be effective, we need to be in the second of these worlds. And a lot of microeconomic evidence strongly suggests that we are. Yet the IMF casts some doubt on that, citing a study that “finds a weak relationship between the output gap and multipliers in the UK”. For the IMF, if not for most labour market economists, the benefits of Plan B are uncertain for the UK (although you might also argue that there’s nothing to lose from trying it).

So we have a situation where Plan B might not cause a panic, but it might also not help. The risks of both plans may be less than their respective opponents claim, but their benefits too may be oversold. So what to do?

In all this discussion of the impact of government spending on output, the IMF, along with most commentators, generally talks in terms of the average effect of government spending. But one thing we know with more certainty is that spending on things like public infrastructure is far more beneficial for output than, say, fiscal incentives for people to lock money away in a pension for 30 years. As I argued in Osborne’s Choice, the composition of government taxation and spending matters far more than most of the macroeconomic debate suggests. That’s why the only way to reduce the damage wrought by a stagnant economy with any certainty is to rejig spending from low- to high-growth areas. And this is an important part of what the IMF proposed yesterday.

The Fund points out that neither Plan A nor Plan B are free lunches. But in economic terms, a funded stimulus is about the cheapest lunch you can get. The catch is that it takes real political leadership to pull it off. The growth crisis demands nothing less.

Ian Mulheirn is Director of the Social Market Foundation.

Ian Mulheirn is the director of the Social Market Foundation.

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Who will win in Stoke-on-Trent?

Labour are the favourites, but they could fall victim to a shock in the Midlands constituency.  

The resignation of Tristram Hunt as MP for Stoke-on-Central has triggered a by-election in the safe Labour seat of Stoke on Trent Central. That had Westminster speculating about the possibility of a victory for Ukip, which only intensified once Paul Nuttall, the party’s leader, was installed as the candidate.

If Nuttall’s message that the Labour Party has lost touch with its small-town and post-industrial heartlands is going to pay dividends at the ballot box, there can hardly be a better set of circumstances than this: the sitting MP has quit to take up a well-paid job in London, and although  the overwhelming majority of Labour MPs voted to block Brexit, the well-advertised divisions in that party over the vote should help Ukip.

But Labour started with a solid lead – it is always more useful to talk about percentages, not raw vote totals – of 16 points in 2015, with the two parties of the right effectively tied in second and third place. Just 33 votes separated Ukip in second from the third-placed Conservatives.

There was a possible – but narrow – path to victory for Ukip that involved swallowing up the Conservative vote, while Labour shed votes in three directions: to the Liberal Democrats, to Ukip, and to abstention.

But as I wrote at the start of the contest, Ukip were, in my view, overwritten in their chances of winning the seat. We talk a lot about Labour’s problem appealing to “aspirational” voters in Westminster, but less covered, and equally important, is Ukip’s aspiration problem.

For some people, a vote for Ukip is effectively a declaration that you live in a dump. You can have an interesting debate about whether it was particularly sympathetic of Ken Clarke to brand that party’s voters as “elderly male people who have had disappointing lives”, but that view is not just confined to pro-European Conservatives. A great number of people, in Stoke and elsewhere, who are sympathetic to Ukip’s positions on immigration, international development and the European Union also think that voting Ukip is for losers.

That always made making inroads into the Conservative vote harder than it looks. At the risk of looking very, very foolish in six days time, I found it difficult to imagine why Tory voters in Hanley would take the risk of voting Ukip. As I wrote when Nuttall announced his candidacy, the Conservatives were, in my view, a bigger threat to Labour than Ukip.

Under Theresa May, almost every move the party has made has been designed around making inroads into the Ukip vote and that part of the Labour vote that is sympathetic to Ukip. If the polls are to be believed, she’s succeeding nationally, though even on current polling, the Conservatives wouldn’t have enough to take Stoke on Trent Central.

Now Theresa May has made a visit to the constituency. Well, seeing as the government has a comfortable majority in the House of Commons, it’s not as if the Prime Minister needs to find time to visit the seat, particularly when there is another, easier battle down the road in the shape of the West Midlands mayoral election.

But one thing is certain: the Conservatives wouldn’t be sending May down if they thought that they were going to do worse than they did in 2015.

Parties can be wrong of course. The Conservatives knew that they had found a vulnerable spot in the last election as far as a Labour deal with the SNP was concerned. They thought that vulnerable spot was worth 15 to 20 seats. They gained 27 from the Liberal Democrats and a further eight from Labour.  Labour knew they would underperform public expectations and thought they’d end up with around 260 to 280 seats. They ended up with 232.

Nevertheless, Theresa May wouldn’t be coming down to Stoke if CCHQ thought that four days later, her party was going to finish fourth. And if the Conservatives don’t collapse, anyone betting on Ukip is liable to lose their shirt. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.