IMF tells Britain: If your economy fails to recover, it’s time for plan B

The International Monetary Fund (IMF) have advised today that "planned fiscal adjustment" will be unavoidable if economic recovery fails to take off.

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The International Monetary Fund (IMF) have advised today that “planned fiscal adjustment” will be unavoidable if economic recovery fails to take off.

lagarde osborneThe IMF consultation on Britain will come as a blow for George Osborne, who has been continually insistent that every international organisation supports his policy positions.

Today’s release from IMF says:

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.

In particular, if growth does not build momentum and is significantly below forecasts even after substantial additional monetary stimulus and further credit easing measures, planned fiscal adjustment would need to be reconsidered.

To preserve credibility, reconsidering the path of consolidation should be in the context of a multi-year plan focused on further reducing the UK’s large structural fiscal deficit when the economy is stronger and taking into account risks to sovereign borrowing costs. Fiscal easing measures in such a scenario should focus on temporary tax cuts and greater infrastructure spending, as these may be more credibly temporary than increases in current spending.

The OECD reports that Britain will only grow 0.5% in 2012. So by IMF’s definition, hasn’t economic recovery already failed to take off?

 


See also:

Pre-budget memo to Mr Osborne: Tax cuts for the many, not the few will boost growth 13 Mar 2012

The double dip begins 25 Jan 2012

US grew almost twice as fast as UK in 2011 27 Jan 2012


 

A report by the Institute for Public Policy Research (IPPR) released in March last year already raised the necessity of a Plan B:

The approach of ‘deficit reduction averaging’ would allow the government to combine reassurance for the markets that an overall target for eliminating the fiscal deficit is in place with some freedom for the government.

If this approach is combined with a slower pace of deficit reduction in the next few years, the likely result would be stronger GDP growth over the medium term, which will help to reduce the deficit in the long run.

The chances of the government adopting such an approach at this time are very slim, as the chancellor and prime minister have persistently ruled out the need for any ‘Plan B’. It would require significantly poor economic performance and probably major political upheaval (including a new Chancellor) for this approach to be adopted.

As shadow chancellor Ed Balls MP said today:

“How much worse do things have to get before David Cameron and George Osborne finally take action? There is no case for delay and there can be no more excuses. Now is the time to act. If we fail to do so, and we see years of slow growth and high unemployment being entrenched, Britain will pay a heavy long term price.

“In Britain cutting spending and raising taxes too far and too fast has backfired, with the resulting slow growth and high unemployment meaning the government is set to borrow an extra £150 billion and borrowing last month higher than a year ago.”

How many institutions have to highlight the flaws of Osborne’s economic strategies before the government considers change?

 


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