IMF calls for Plan B
More infrastructure spending and tax cuts, and less focus on reducing the deficit.
The IMF has explicitly called for the UK to abandon austerity, arguing that the Government should boost infrastructure spending, possibly by borrowing at historically-low interest rates, and that the Bank of England should cut its rates and perform another round of quantitative easing.
The primary recommendations are focused on the Bank. "Further monetary easing is required", as well as "further quantitative easing" and possibly "cutting the policy rate below its current level of 0.5 percent".
The IMF supports the idea of credit easing (performing a program analogous to quantitative easing but focusing on SMEs rather than banks), and writes that the Government should consider "purchasing private-sector bonds to support mortgage lending and financing for business".
The monetary advice is well timed to influence a Bank which has just agreed to examine its own failures when it came to dealing with the crisis, but the real political bombshells come in the advice for future fiscal policy.
Arguing for greater infrastructure spending, the Fund writes:
Fiscal space for further growth-enhancing measures could be generated by property tax reform, restraint of public employee compensation growth, and better targeting of transfers to those in need. This fiscal space could be used to fund higher infrastructure spending, which has a high multiplier and raises potential output. It will also be important to shield the poorest from the impact of consolidation.
Translation: austerity for civil servants, more means-testing and reformed council taxes/stamp duty should result in extra money for the government, which should be used not to reduce the deficit but to build infrastructure, which is far better value for money. The IMF adds that:
If growth does not build momentum and is significantly below forecasts even after substantial additional monetary stimulus and further credit easing measures, planned fiscal adjustment would need to be reconsidered. Under these circumstances, gains from delaying fiscal consolidation could be larger as multipliers are estimated to move inversely with growth and the effectiveness of monetary policy.
Translation: If we have low growth even after its prior recommendations are taken into account, the Government's budgetary priority should be growth, not austerity. By focusing on infrastructure spending and temporary tax cuts, the Government can retain credibility that it will pay down the deficit in the future while boosting growth in the short term.