Reading between the lines of today’s report on the UK, it’s clear that the International Monetary Fund is calling for the coalition to adopt a funded fiscal stimulus now to encourage growth
So in its statement today, did the International Monetary Fund urge the UK to adopt a fiscal stimulus now or not? What’s clear is that it called for fiscal easing and slowing the pace of cuts in the event that growth fails to take hold. One wonders how long the economy must languish before it gives that approach green light.
But what is clear is that it also urged a funded fiscal stimulus now as one of the immediate measures needed to boost growth. The statement says that ‘There is scope within the current overall fiscal stance to improve the quality of fiscal adjustment to support growth.’
In fleshing out what it meant, the IMF produced the following beautifully opaque description: ‘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.’
In her comments at the Treasury, however, IMF chief Christine Lagarde, tweaked that message to avoid offending her host, saying that monetary measures should be used ‘prior to considering the improved fiscal consolidation’. That’s not what her organisation’s note implies. As Stephanie Flanders has pointed out, Lagarde’s politeness may have saved the Chancellor’s blushes.
Besides, if Lagarde views the IMF’s growth-friendly fiscal consolidation proposal as ‘improved’ what exactly is the argument for holding off?
In describing how to fund this ‘improved’ fiscal consolidation, the IMF proposes ‘better targeting of transfers to those in need’. Meanwhile, it also makes it clear that it’s important to ‘shield the poorest from the impact of the consolidation’.
While this isn’t going to win any Plain English prizes, it’s clear what’s being proposed: cut middle-class benefits (winter fuel payments and child benefit) and tax breaks (higher-rate pensions tax relief) to the better-off. Indeed, this is identical to what the Social Market Foundation proposed in Osborne’s Choice.
Among the other measures commended to George Osborne is further credit easing to get credit flowing into the economy. The IMF proposes that the Treasury purchase private-sector bonds and provide longer-term funding facilities for banks. Anything that stimulates investment is welcome. But in economic terms, there’s little difference between government borrowing to invest itself and government guaranteeing the lending of others. The taxpayer is on the hook either way. So why wouldn’t the government just do its own borrowing and investment?
Rather like a dodgy PFI, guaranteeing other people’s loans offers the possibility of stimulating the economy without the liabilities showing up on the public sector net debt. In other words it’s a political face-saver that’s conceptually very similar to a borrowing-financed investment drive of the type the IMF suggests holding off on. A bit odd, you might think.
But there’s a good reason to be cautious about credit easing as an alternative to direct public investment. Government guaranteeing other people’s loans leaves the Treasury vulnerable to being stuffed with dodgy debt. If and when the loans turn bad, the taxpayer will be hit by the losses. So credit easing is no free lunch – its chief attraction is arguably in flattering the figures and improving political career prospects.
The question is: if the government is worried about how the bond markets would react to borrowing more, why does it think they’ll react any differently to taking on a bunch of opaque loan guarantees?
As NIESR’s Jonathan Portes tweeted, the IMF’s enthusiasm for off-balance sheet manoeuvres is ‘intellectually inconsistent [with opposing extra borrowing to invest] – expect politicians to like off balance sheet finance, but economists should be very wary’.
So, in conclusion, Lagarde today gave the Chancellor a bit of a pat on the back, but below the headlines the message is very different. By calling for a funded fiscal stimulus now, the IMF has made clear its view that keeping calm and carrying on won’t cut it any longer.