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25 May 2010

Why the debt hysterics have got it wrong

IMF economist warns Europe against Greek-style austerity cuts.

By George Eaton

Shortly before the election, a small band of conservative commentators, led by Niall Ferguson, made the bizarre argument that David Cameron should call in the IMF as soon as he entered Downing Street, paving the way for a programme of “austerity cuts”.

Had the Prime Minister followed their counsel, I doubt the right would have got the answer it was looking for. The IMF, like most other major economic institutions, has consistently warned states of the dangers of slashing spending while still in the recovery phase.

Here’s what the IMF’s chief economist, Olivier Blanchard, told the French business daily La Tribune:

There is indeed a risk that, under market pressure, some countries overdo austerity. That would be a mistake.

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George Osborne may have claimed that Britain faces a Greek-style meltdown unless it cuts spending now, but Blanchard elegantly demolishes this argument in just a few sentences:

Markets tend to lump a series of countries in the same basket. In fact, other European countries don’t need to take the same draconian measures as Greece to reduce their budget deficits.

They are more credible to start with, with less debt, and they can afford a more gradual adjustment to limit the negative impact of consolidation on short-term growth.

Sadly Osborne (and his state-slashing sidekick David Laws) appear to be unacquainted with any of these arguments. Britain’s public debt, whatever today’s misleading Independent front page may claim, is, at 62 per cent of GDP, still well below the average of advanced G20 members.

For instance, prudent Germany has a public debt of 77 per cent, France has a debt of nearly 80 per cent and Japan has a public debt of 192 per cent.

In 1956, Britain’s public debt stood at 146 per cent — more than twice its current level — but was soon reduced, not through draconian spending cuts, but through economic growth, tax rises and moderate inflation.

But will the economic right recall any of this or report on the latest IMF warning? I won’t hold my breath.

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