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.

Daily Mail
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Who "speaks for England" - and for that matter, what is "England"?

The Hollywood producer Sam Gold­wyn once demanded, “Let’s have some new clichés.” The Daily Mail, however, is always happiest with the old ones.

The Hollywood producer Sam Gold­wyn once demanded, “Let’s have some new clichés.” The Daily Mail, however, is always happiest with the old ones. It trotted out Leo Amery’s House of Commons call from September 1939, “Speak for England”, for the headline on a deranged leader that filled a picture-free front page on David Cameron’s “deal” to keep Britain in the EU.

Demands that somebody or other speak for England have followed thick and fast ever since Amery addressed his call to Labour’s Arthur Greenwood when Neville Chamberlain was still dithering over war with Hitler. Tory MPs shouted, “Speak for England!” when Michael Foot, the then Labour leader, rose in the Commons in 1982 after Argentina’s invasion of the Falklands. The Mail columnist Andrew Alexander called on Clare Short to “speak for England” over the Iraq War in 2003. “Can [Ed] Miliband speak for England?” Anthony Barnett asked in this very magazine in 2013. (Judging by the 2015 election result, one would say not.) “I speak for England,” claimed John Redwood last year. “Labour must speak for England,” countered Frank Field soon afterwards.

The Mail’s invocation of Amery was misconceived for two reasons. First, Amery wanted us to wage war in Europe in support of Hitler’s victims in Poland and elsewhere and in alliance with France, not to isolate ourselves from the continent. Second, “speak for England” in recent years has been used in support of “English votes for English laws”, following proposals for further devolution to Scotland. As the Mail was among the most adamant in demanding that Scots keep their noses out of English affairs, it’s a bit rich of it now to state “of course, by ‘England’. . . we mean the whole of the United Kingdom”.

 

EU immemorial

The Mail is also wrong in arguing that “we are at a crossroads in our island history”. The suggestion that the choice is between “submitting to a statist, unelected bureaucracy in Brussels” and reclaiming our ancient island liberties is pure nonsense. In the long run, withdrawing from the EU will make little difference. Levels of immigration will be determined, as they always have been, mainly by employers’ demands for labour and the difficulties of policing the borders of a country that has become a leading international transport hub. The terms on which we continue to trade with EU members will be determined largely by unelected bureaucrats in Brussels after discussions with unelected bureaucrats in London.

The British are bored by the EU and the interminable Westminster arguments. If voters support Brexit, it will probably be because they then expect to hear no more on the subject. They will be sadly mistaken. The withdrawal negotiations will take years, with the Farages and Duncan Smiths still foaming at the mouth, Cameron still claiming phoney victories and Angela Merkel, François Hollande and the dreaded Jean-Claude Juncker playing a bigger part in our lives than ever.

 

An empty cabinet

Meanwhile, one wonders what has become of Jeremy Corbyn or, indeed, the rest of the shadow cabinet. The Mail’s “speak for England” leader excoriated him for not mentioning “the Number One subject of the hour” at PM’s Questions but instead asking about a shortage of therapeutic radiographers in the NHS. In fact, the NHS’s problems – almost wholly caused by Tory “reforms” and spending cuts – would concern more people than does our future in the EU. But radiographers are hardly headline news, and Corbyn and his team seem unable to get anything into the nation’s “any other business”, never mind to the top of its agenda.

Public services deteriorate by the day, George Osborne’s fiscal plans look increasingly awry, and attempts to wring tax receipts out of big corporations appear hopelessly inadequate. Yet since Christmas I have hardly seen a shadow minister featured in the papers or spotted one on TV, except to say something about Trident, another subject that most voters don’t care about.

 

Incurable prose

According to the Guardian’s admirable but (let’s be honest) rather tedious series celeb­rating the NHS, a US health-care firm has advised investors that “privatisation of the UK marketplace . . . should create organic and de novo opportunities”. I have no idea what this means, though it sounds ominous. But I am quite certain I don’t want my local hospital or GP practice run by people who write prose like that.

 

Fashionable Foxes

My home-town football team, Leicester City, are normally so unfashionable that they’re not even fashionable in Leicester, where the smart set mostly watch the rugby union team Leicester Tigers. Even when they installed themselves near the top of the Premier League before Christmas, newspapers scarcely noticed them.

Now, with the Foxes five points clear at the top and 7-4 favourites for their first title, that mistake is corrected and the sports pages are running out of superlatives, a comparison with Barcelona being the most improbable. Even I, not a football enthusiast, have watched a few matches. If more football were played as Leicester play it – moving at speed towards their opponents’ goal rather than aimlessly weaving pretty patterns in midfield – I would watch the game more.

Nevertheless, I recall 1963, when Leicester headed the old First Division with five games to play. They picked up only one more point and finished fourth, nine points adrift of the league winners, Everton.

 

Gum unstuck

No, I don’t chew toothpaste to stop me smoking, as the last week’s column strangely suggested. I chew Nicorette gum, a reference written at some stage but somehow lost (probably by me) before it reached print.

Editor: The chief sub apologises for this mistake, which was hers

Peter Wilby was editor of the Independent on Sunday from 1995 to 1996 and of the New Statesman from 1998 to 2005. He writes the weekly First Thoughts column for the NS.

This article first appeared in the 11 February 2016 issue of the New Statesman, The legacy of Europe's worst battle