The IMF's Plan B - more cuts, not fewer | The Waugh Room |

Monday 6th June 2011 | 15:36

The IMF's Plan B - more cuts, not fewer

Given his monotone delivery and dry-as-dust econom-ese, John Lipsky proved today just why he'd never get the top job at the IMF - even if he was a European.

But while a Lagarde (and a DSK) would have the gallic flourish, Lipsky delivered the most important thing of all for George Osborne: a steadfast refusal to say the UK needs a Plan B.

In fact, Lipsky was so determined not to undermine the Chancellor that he refused to define the "prolongued period of weak growth" that could trigger a remotely hypothetical Plan B. "I wouldn't want to get into any false precision about definitions..." is how he put it.

The IMF report does indeed set out what it thinks would need to happen if, perish the thought, both its economists and those at HMT get their forecasts and policies wrong.

Yet the answer is not a Keynesian/Ballsian injection of more fiscal stimulus or public spending. It is the opposite: temporary tax cuts and more quantitative easing by the Bank of England.

Should the worse come to the worse, I note that the IMF also says that even deeper welfare cuts would be needed.

The key passage in the IMF report is this:

"...tax cuts are faster to implement and more credibly temporary than expenditure shifts and should be targeted to investment, low-income households, or job creation to increase their multipliers.

"Simultaneous adoption of deeper long-run entitlement reform [my italics] would be desirable to safeguard fiscal sustainability and market confidence..."

In the huddle after today's press conference, no one at the Treasury would go anywhere near commenting on any of this stuff, insisting that this was the IMF's recommendation, not the Government's.

Yet I suspect that some Tory MPs may renew their calls for tax cuts or even a full-bloodied reversal of Labour's 'jobs tax' ie National Insurance rise.

Lipsky even fuelled the cause of some such as Fraser Nelson who have long argued that actually the current Coalition spending cuts don't go far enough.

In the Q&A, he pointed out today: "The level of public spending as a percentage of GDP in our forecast has reduced by about half a per cent of GDP as compared to the previous fiscal year. However, it remains very far above the pre-crisis levels of spending and represents a long-term high in spending. It's important to maintain that perspective"

The IMF's a lot of things. But Keynesian it 'aint.

Leave a comment...

Dan

11:35 |
07 Jun 2011
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5

Sorry to put it harshly, but the economics here is... dead wrong. A tax cut, if not matched by spending cuts, is a fiscal stimulus - the government increases borrowing to take up the slack in the economy. It's plenty Keynesian - the IMF quotation you've used even mentions multipliers: http://en.wikipedia.org/wiki/Fiscal_multiplier

Will

13:30 |
07 Jun 2011
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2

You do know they let the Treasury have input to and then approve the IV Consultation Report (the one released yesterday) ?

WheresMyVote

16:09 |
07 Jun 2011
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13

Can the media stop trying to compare Balls' advocating pissing more tax-payer cash into the void with Keynes? Keynes' theory unequivocally stated that in the good times you pay off government debt and thus have surpluses to permit a deficit when economies face hard times. Balls’ (and his mentor, Brown) spent a decade of unparalleled economic growth running a structural deficit. They made no attempts to pay down government debt. In fact during this period of growth, the official measure of debt increased in real terms - without including the fiddle of off-balance sheet debts.

Robert Eve

19:09 |
07 Jun 2011
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4

Of course the cuts don't go deep enough.

Duncan Needham

23:06 |
07 Jun 2011
0

As per Dan, I'm afraid you've got totally the wrong end of the stick. The IMF is arguing for a stimulus, either fiscal through tax cuts or monetary through more quantitative easing. And the concept of the multiplier is at the heart of Keynesian analysis. The IMF's modelling has always been built on a Keynesian multiplier.

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