The IMF has debunked the myth of Osborne's fiscal "credibility"

Slowing the cuts would not trigger a bond market revolt.

There is a huge amount of interesting material in the full IMF staff report on the UK, released today, in particular the lasting damage ("hysteresis" to economists) done by this prolonged period of very low growth.  But in this post I wanted to draw attention to one particular paragraph (it is para 43 on page 38).   I reproduce it here in full:

Some further slowing of consolidation is unlikely to trigger major market turmoil

43. Further slowing consolidation would likely entail the government reneging on its net debt mandate. Would this trigger an adverse market reaction? Such hypotheticals are impossible to answer definitively, but there is little evidence that it would. In particular, fiscal indicators such as deficit and debt levels appear to be weakly related to government bond yields for advanced economies with monetary independence. Though such simple relationships are only suggestive, they indicate that a moderate increase in the UK’s debt-to-GDP ratio may have small effects on UK sovereign risk premia (though a slower pace of fiscal tightening may increase yields through expectations of higher near-term growth and tighter monetary policy).  This conclusion is further supported by the absence of a market response to the easing of the pace of structural adjustment in the 2011 Autumn Statement. Bond yields in the US and UK during the Great  Recession have also correlated positively with equity price movements, indicating that bond yields have been driven more by growth expectations than fears of a sovereign crisis.

This couldn't be clearer.  It is saying two things.  First, the reason long-term gilt yields are low in the UK (and similarly in virtually every other "advanced economy with monetary independence") is weak growth, not "confidence" or "credibility".  "Bond yields are driven more by growth expectations."  That is, yields are low not because of economic confidence but because of its exact opposite. This is precisely what I and others (Simon Wren-Lewis here, and of course Paul Krugman in the US) have long been arguing.  Indeed, the specific evidence the IMF cites - that yields have fallen when stock markets have fallen - is precisely that, in the UK, I first pointed  here a year ago.  

Second, that there is no reason to believe that slowing fiscal consolidation would "trigger an adverse market reaction".  In other words, when the Chancellor said that "these risks [of slowing consolidation] are very real, not imaginary", he was, once again, indulging in evidence-free speculation, not serious analysis.  Indeed, the Fund accurately points out that the main reason yields might rise (slightly, not precipitiously) if fiscal policy were to be loosened would be because of "expectations of higher near-term growth". As I pointed out here, this would be good news.

So, the IMF agrees that the reason gilt yields are low is because of weak growth, not confidence; and that we could loosen policy with minimal risk and probable benefit.  This is an explicit endorsement of the argument set out by Paul Krugman and Richard Layard (and endorsed by a long list of eminent economists, not to mention me) in their Manifesto for Economic Sense:  "there is massive evidence against the confidence argument; all the alleged evidence in favor of the doctrine has evaporated on closer examination."

 As I noted, the Fund's recommendations are, to be polite, inconsistent. But the analysis is spot on. And it explodes whatever is left of the credibility of the analysis underlying the government's fiscal strategy.

This piece originally appeared on Jonathan Portes's blog Not the Treasury view ...

George Osborne, "indulging in evidence-free speculation, not serious analysis." Photograph: Getty Images.

Jonathan Portes is director of the National Institute of Economic and Social Research and former chief economist at the Cabinet Office.

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How the shadow cabinet forced Jeremy Corbyn not to change Labour policy on Syria air strikes

Frontbenchers made it clear that they "would not leave the room" until the leader backed down. 

Jeremy Corbyn had been forced to back down once before the start of today's shadow cabinet meeting on Syria, offering Labour MPs a free vote on air strikes against Isis. By the end of the two-hour gathering, he had backed down twice.

At the start of the meeting, Corbyn's office briefed the Guardian that while a free would be held, party policy would be changed to oppose military action - an attempt to claim partial victory. But shadow cabinet members, led by Andy Burnham, argued that this was "unacceptable" and an attempt to divide MPs from members. Burnham, who is not persuaded by the case for air strikes, warned that colleagues who voted against the party's proposed position would become targets for abuse, undermining the principle of a free vote.

Jon Ashworth, the shadow minister without portfolio and NEC member, said that Labour's policy remained the motion passed by this year's conference, which was open to competing interpretations (though most believe the tests it set for military action have been met). Party policy could not be changed without going through a similarly formal process, he argued. In advance of the meeting, Labour released a poll of members (based on an "initial sample" of 1,900) showing that 75 per cent opposed intervention. 

When Corbyn's team suggested that the issue be resolved after the meeting, those present made it clear that they "would not leave the room" until the Labour leader had backed down. By the end, only Corbyn allies Diane Abbott and Jon Trickett argued that party policy should be changed to oppose military action. John McDonnell, who has long argued for a free vote, took a more "conciliatory" approach, I'm told. It was when Hilary Benn said that he would be prepared to speak from the backbenches in the Syria debate, in order to avoid opposing party policy, that Corbyn realised he would have to give way. The Labour leader and the shadow foreign secretary will now advocate opposing positions from the frontbench when MPs meet, with Corbyn opening and Benn closing. 

The meeting had begun with members, including some who reject military action, complaining about the "discorteous" and "deplorable" manner in which the issue had been handled. As I reported last week, there was outrage when Corbyn wrote to MPs opposing air strikes without first informing the shadow cabinet (I'm told that my account of that meeting was also raised). There was anger today when, at 2:07pm, seven minutes after the meeting began, some members received an update on their phones from the Guardian revealing that a free vote would be held but that party policy would be changed to oppose military action. This "farcical moment", in the words of one present (Corbyn is said to have been unaware of the briefing), only hardened shadow cabinet members' resolve to force their leader to back down - and he did. 

In a statement released following the meeting, a Corbyn spokesperson confirmed that a free vote would be held but made no reference to party policy: 

"Today's Shadow Cabinet agreed to back Jeremy Corbyn's recommendation of a free vote on the Government's proposal to authorise UK bombing in Syria.   

"The Shadow Cabinet decided to support the call for David Cameron to step back from the rush to war and hold a full two day debate in the House of Commons on such a crucial national decision.  

"Shadow Cabinet members agreed to call David Cameron to account on the unanswered questions raised by his case for bombing: including how it would accelerate a negotiated settlement of the Syrian civil war; what ground troops would take territory evacuated by ISIS; military co-ordination and strategy; the refugee crisis and the imperative to cut-off of supplies to ISIS."

George Eaton is political editor of the New Statesman.