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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Amber Rudd's report on the benefits of EU immigration is better late than never

The study will strengthen the case for a liberal post-Brexit immigration system. 

More than a year after vowing to restrict EU immigration, the government has belatedly decided to investigate whether that's a good idea. Home Secretary Amber Rudd has asked the independent Migration Advisory Committee to report on the costs and benefits of free movement to the British economy.

The study won't conclude until September 2018 - just six months before the current Brexit deadline and after the publication of the government's immigration white paper. But in this instance, late is better than never. If the report reflects previous studies it will show that EU migration has been an unambiguous economic benefit. Immigrants pay far more in tax than they claim in benefits and sectors such as agriculture, retail and social care depend on a steady flow of newcomers. 

Amber Rudd has today promised businesses and EU nationals that there will be no "cliff edge" when the UK leaves the EU, while immigration minister Brandon Lewis has seemingly contradicted her by baldly stating: "freedom of movement ends in the spring of 2019". The difference, it appears, is explained by whether one is referring to "Free Movement" (the official right Britain enjoys as an EU member) or merely "free movement" (allowing EU migrants to enter the newly sovereign UK). 

More important than such semantics is whether Britain's future immigration system is liberal or protectionist. In recent months, cabinet ministers have been forced to acknowledge an inconvenient truth: Britain needs immigrants. Those who boasted during the referendum of their desire to reduce the number of newcomers have been forced to qualify their remarks. Brexit Secretary David Davis, for instance, recently conceded that immigration woud not invariably fall after the UK leaves the EU. "I cannot imagine that the policy will be anything other than that which is in the national interest, which means that from time to time we’ll need more, from time to time we’ll need less migrants." 

In this regard, it's striking that Brandon Lewis could not promise that the "tens of thousands" net migration target would be met by the end of this parliament (2022) and that Rudd's FT article didn't even reference it. As George Osborne helpfully observed earlier this year, no senior cabinet minister (including Rudd) supports the policy. When May departs, whether this year or in 2019, she will likely take the net migration target with her. 

In the meantime, even before the end of free movement, net migration has already fallen to its lowest level since 2014 (248,000), while EU citizens are emigrating at the fastest rate for six years (117,000 left in 2016). The pound’s depreciation (which makes British wages less competitive), the spectre of Brexit and a rise in hate crimes and xenophobia are among the main deterrents. If the report does its job, it will show why the UK can't afford for that trend to continue. 

George Eaton is political editor of the New Statesman.