Wednesday, November 10, 2010

IMF Slams The Pink 'Un


And to think it used to be the voice of finance

Yesterday the IMF published its latest assessment of the UK economy. It is a ringing endorsement of the coalition's tough fiscal measures and a clear rejection of the crass Keynesianism practised by the late Mr G Brown and his scary apprentice Mr Balls.

In one particularly interesting section the IMF specifically takes on the Financial Times, which has been right at the forefront of the Ballsian calls for postponing the cuts (see numerous articles such as “Why the Balls critique is correct,” September 2, 2010, and “The IMF’s foolish praise for austerity,” September 30, 2010). Having considered the FT's various arguments for delay, the IMF rejects them all, saying:
"...a significant fiscal tightening with frontloading in 2011/12 is appropriate to secure confidence in the UK’s debt sustainability."
Which in IMFspeak is saying to the FT - and to all those who take its Ballsian line - that they really have lost the market plot. So much for the FT being the authoritative voice of finance and business*.

In terms of the overall score, the IMF gives the coalition's fiscal plans pretty well a perfect 10:
  • "Although this consolidation effort involves painful decisions and dampens shortrun growth, it is necessary to enhance credibility and ensure fiscal sustainability" - without it the UK would have been exposed to a potentially devastating loss of market confidence
  • "The budget contains an appropriate mix of concrete spending and revenue measures, lending credibility to the government’s consolidation plan" - "The focus on spending measures is appropriate in light of the significant run-up in spending over the last decade and international experience showing that expenditure-based consolidations lead to longer-lasting budgetary improvements"
  • The focus on welfare reform - especially pension entitlements - is absolutely correct
  • The establishment of the OBR as an independent fiscal monitor is also welcome
The one area where they call for further action is in the establishment of clear fiscal rules - just like we have repeatedly called for.

As always, the IMF's report contains a host of interesting charts. And here's one that shows how the total fiscal squeeze over the next few years breaks down between what George has announced and what was already in the pipeline from Darling's last budget:


As we can see, the bulk of the planned squeeze in all years was already planned by Darling. Cumulative over the period to 2014-15, George's squeeze amounts to 8% of GDP compared to 6% planned by Darling. Although of course, Darling never told us quite how he intended to deliver it - ie what he was actually going to cut.

A key point that the IMF stresses throughout is that the fiscal squeeze is not expected to stymie the recovery. It is true that they're a little less bullish on GDP growth than either the Treasury or the Bank of England (and more on the Bank's latest Inflation Report tomorrow), but they still expect growth close to 2% both this year and next. And they go out of their way to say it could be higher as well as lower - unlike what some commentators say, the IMF assessment is that the risks are evenly balanced:

So should we be cheered?

Yes certainly.

The IMF may have it wrong - nobody has yet found that fully functioning crystal ball - but this is their best objective assessment, It is not a forecast conditioned by some ideological desire to bash the evil Tories.

Update (12/11/10) - The FT's Martin Wolf (who wrote every one of the FT articles singled out for attack by the IMF) responds here. Wolf is always worth reading, but he is a full-on Keynesian, highly dismissive of BOM-style concerns about our ballooning national debt. Unsurpisingly, he describes the IMF position as "penny wise and pound foolish". Goodness only knows how much debt we'd run up with him at the controls.

*Footnote - It has never been entirely clear what happened to the FT. Back in the day, it was the City's paper, sound on finance, sound on business, and sound on world affairs. But then in the early 90s for some extraordinary reason, it lurched to the left, backing Kinnock in 1992. Kinnock! And then it proceded to back Labour in every single election right up to 2010, when they finally and reluctantly switched back. Sure, it is still the UK's definitive business newspaper. But Tyler knows a number of City types who consign the pink front end - the FT's editorialising end - straight into the WPB unread.

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