The Staggers

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IMF warns the UK and others: change course now

Coutries with low interest-rates should reconsider the pace of cuts, says the IMF.

By George Eaton Published 24 January 2012 18:51

Until recently, George Osborne was fond of boasting that his side had the support of "the IMF, the OECD, the credit rating agencies, the bond markets, the European Commission". But after seeing the results of austerity in Britain and the eurozone, all of these groups have changed tack.

Here's the key passage from today's IMF report:

Those [advanced countries] with very low interest rates or other factors that create adequate fiscal space, including some in the euro area, should reconsider the pace of near-term fiscal consolidation. Overdoing fiscal adjustment in the short term to counter cyclical revenue losses will further undercut activity, diminish popular support for adjustment, and undermine market confidence.

The IMF doesn't name individual countries but it's clear that it has the UK, along with the US and Germany, in mind. Britain's interest rates, partly thanks to the Bank of England buying up hundreds of billions of gilts, are at historic lows, offering Osborne the chance to borrow to stimulate growth and jobs.

As long ago as October 2009, the NS warned that too great a pace of austerity would be self-defeating. Now, albeit far too late, the IMF agrees. Osborne's deficit reduction programme has left Britain with slower growth than every EU country except Greece, Cyprus, Portugal, Slovenia and Denmark, and he is set to borrow billions more than Labour planned.

There is no prospect of Osborne changing course, the political cost would be too high, but it is becoming ever harder for him to argue that there is no alternative.

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20 comments

Wed, 2012-01-25 19:43 — Paul Danon (not verified)

They must be mad. We just hit 1tr of debt with several more trillion undeclared, and they want us to slow the cuts? They need to bit harder so that tax can go down.

Tue, 2012-01-24 19:55 — matthew fox (not verified)

The IMF have cut British growth by 1% for this year.

As usual, we get silence from the Right.

Tue, 2012-01-24 20:23 — Angela (not verified)

Change course really? that's not what was said on the Jeff Randall show minutes ago!

Jorg Decressin tells Jeff Randall Live: There is no need for British govt to switch to a ‘Plan B’ for the economy.

Tue, 2012-01-24 20:27 — Dickie1

It would be funny if it didn't mean that we really are on the road to total financial oblivion. Obviously the IMF etc can change their minds when it suits them. We however are stuck with this for three more years.

Tue, 2012-01-24 20:27 — Eddy S (not verified)

loose monetary policy and tight fiscal policy is the correct policy for now.

but fiscal policy can be refined by reducing spend on govt admin jobs and wages which is a drag on the economy (increasing structural problems) and increasing on infrastructure spend which enhances long term growth potential.

Tue, 2012-01-24 20:27 — Angela (not verified)

Oh, I forgot to mention who Jorg Decressin is - He is from the IMF and one of the main authors of the World Economic Outlook Report and was talking to Jeff Randall Live.

Tue, 2012-01-24 21:02 — Indu Pendent (not verified)

"Overdoing fiscal adjustment in the short term to counter cyclical revenue losses"

But the UK does not have a cyclical revenue loss problem - its deficit is structural not cyclical. The fix is different. France has a cyclical deficit.

This distintion is important - if we do not have a robust plan to fix the structural deficit fairly quickly then the markets will turn against us.

Labour are combining the cyclical and structure to exploit public support for votes. But its cruel and dishonest of the Labour elite to do this. The structural deficit will remain after the economy has picked up and even if it boomed. It is going to take a further downward cut in living standard of UK workers to clear the structual deficit and there is no magic state borrowing vote winning fair which can make it go away.

Tue, 2012-01-24 21:09 — Indu Pendent (not verified)

@matt
"As usual, we get silence from the Right"

And from Blackbuster and his boss Balls up. It must be that the market research is not flagging a bandwagon for them to jump on.

BTW: I've lost the plot with Labour economic policy. Apart from wishing growth higher, losing the AAA and making the same cuts as the coalition against public sector union paymasters wishes, what actaully would Labour do?

Tue, 2012-01-24 21:15 — Indu Pendent (not verified)

@Eddy S

You've nailed it.

Tue, 2012-01-24 21:26 — matthew fox (not verified)

It seems Inastew has forgot that there was QE in Oct 11. Mervyn had buyer's remorse and had to perform the " Act of a desperate government "

There is talk of more QE on the way, due to unemployment still on the march.

Tue, 2012-01-24 21:27 — Dickie1

@ Indu Pendent,

But what are the Tories doing. Cutting the deficit? (translates to 'borrowing more' and then putting a brave face on it) This is turning into a straightforward race to see who is most useless, and as far as I can see it's a dead-heat at the moment.

Tue, 2012-01-24 21:36 — Mr Danger

"offering Osborne the chance to borrow to stimulate growth and jobs."

Yes, maybe we should try running a deficit. And lets not half do it, why not try running one of the biggest deficits in Europe. Guess what? We have been, right from the beginning!

"As long ago as October 2009, the NS warned that too great a pace of austerity would be self-defeating."

And how much austerity have we had? Oh that's right, zero. Is zero too great a pace?

Its hard to accept Eaton's conceit that the IMF was referring to the UK and Germany when they specifically mentioned neither, only the US. I guess Eaton can read their minds with such confidence that it justifies a screaming headline. In fact, maybe he skipped over reading the report and went straight to mind reading, since he somehow missed the point in the summary, first paragraph, front page:

"the key policy requirements are to address mediumterm fiscal imbalances"

Which is precisely what the coalition is doing.

Tue, 2012-01-24 21:58 — Dickie1

"Those [advanced countries] with very low interest rates or other factors that create adequate fiscal space, including some in the euro area, should reconsider the pace of near-term fiscal consolidation."

UK interest rate: .5%
UK Location: sort of in europe-ish

'euro area', is that different to the 'eurozone'?

Thu, 2012-01-26 00:28 — Indu Pendent (not verified)

@matt
Wrong. Wrong. Wrong.

I'm proposing running inflation at 4%-5%. You are proposing cutting it.

If we cut inflation now buy higher interest rates it would choke of jobs and disposable income and lead to deflation seen in the great depression.

We can use higher inflation to keep economic activity stable but with a steady revaluation of labor relative to capital. It needs to happend nationally across the economy but what it means is that UK businesses will gain a relative compative advantage. This will attract capital into the UK so long at taxes do not penalise profits.

Wed, 2012-01-25 01:13 — Indu Pendent (not verified)

@D-504
'structure' deficit actually mean 'fall in living standard'. Politicians cant talk about it openly. The only way to fix it is shrinking the state which, due to the fiscal multiplier, means lower per capita GDP.

What the coalition should be doing is investing more in projects that have an economic return like renewable energy. Labour have missed a massive bandwagon which the coalition will get now by concentrating on productive capita investment spending rather than public sector expenditure.

Wed, 2012-01-25 01:18 — Indu Pendent (not verified)

@matt

"more QE on the way" - bring it on.

Lets get the pound to $1.45 from its current $1.54. Lets drive the adjustment to wages in real terms at 4% per year.

Just think, 5 years of this and our wages will be 30% lower making our exports may be 60% cheaper. The UK would fly.

Thu, 2012-01-26 21:00 — matthew fox (not verified)

5% inflation will attract capital, really.

What is a " Compative Advantage "?

Wed, 2012-01-25 08:48 — Matt Thompson (not verified)

'the left' 'the right'...blaa blaaa how about just being plain old pragmatic? 2% interest rates... AAA rating = spending down. I guess the NS and its lobotomised supporters dont mind punishing the next generation.