The preliminary findings of an IMF Article IV mission are always a highly political document, as Paul Krugman points out. That is why you can spin today’s report on the UK as support for the current government line, or implicit criticism of it. And a lot of the reporting focuses on just this political angle. This is a shame, because it misses the clear message of the report, which is that UK macroeconomic policy is too restrictive.
On monetary policy the report is absolutely clear. A bold heading reads “Further monetary easing is required”. The detail calls for more QE, and perhaps a further interest rate cut. One reason why the economists at the Fund are prepared to make such a clear criticism of the current MPC stance may be outlined in my recent post.
On fiscal policy, the Fund continues to call for balanced budget fiscal expansion. The heading here is a little more opaque: “There is scope within the current overall fiscal stance to improve the quality of fiscal adjustment to support growth.” However this from the text below is pretty clear: “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.” For more detail see Ian Mulheirn here.
Finally we should note that good policy is about allowing for risk, which is what the current government did not do when embarking on additional austerity. The IMF knows this, which is why it says, in another heading: “Fiscal easing and further use of the government’s balance sheet should be considered if downside risks materialize and the recovery fails to take off.” For downside risk read the Euro blows up. Now I would argue that the outlook even if the Euro survives is pretty grim: the latest OECD forecast is for growth of 0.5% this year, and 1.9% next. As a result, fiscal easing seems appropriate even without downside risk.
But the question I have is this. We are told that the government is making contingency plans if Greece exits the Euro. Presumably it is thinking about what it would do if there was a severe recession in the Euro area. Do they agree with the Fund that fiscal easing should be considered in these circumstances?
Isn't a "balanced budget fiscal expansion" increasing government spending and revenue together? If so, then the the passage you quote from the IMF report doesn't seem to clearly endorse this.ReplyDelete
Two of the three measures mentioned are speak about funding higher infrastructure spending with lower spending elsewhere (reducing the public sector wage bill, and 'better targeting of transfers' - i.e. cutting transfers to those who don't need it). Unless I've got the wrong end of the stick and a balanced budget fiscal expansion can also mean altering the composition of government spending too?
First the pedantic point. The 'balanced budget multiplier' normally involves an increase in government spending on goods and services financed by higher taxes. However I think when macroeconomists and the IMF talk about balanced budget expansion, they normally mean changing the fiscal mix in any way that might increase overall demand. So, if you take away child benefit from the rich who have a low propensity to consume, and give it as a transfer to the poor who have a higher propensity to consume, then demand increases. Equally if you have a temporary reduction in public sector pay, and use this money to build infrastructure, because some of the former will lead to lower saving you get a net increase in demand. The trouble with changing the fiscal mix, of course, is that for everyone who gains there is someone who loses.ReplyDelete
Thanks very much - appreciate the clarification.Delete