The IMF suggests the chancellor has shot the whole country in the foot
Did Labour spend too much? Even after the election, the question keeps popping up.
When it is asked of Labour politicians, it means: do you accept now that the Tory attack line all the way through the coalition government, that you can’t trust Labour with the economy, was true?
I’m saddened to say that attack line won the Tories the election. Even where Labour could lead – the NHS – it only took the Tories reminding the electorate that without a good economy our NHS would tank, and the conversation was back to how Labour had failed the economy.
But yesterday saw the publication of a very detailed, and very clever, discussion paper by the International Monetary Fund (IMF) which sought to raise an angle on the national debt question that its authors had felt was under-explored: what if trying to reduce the national debt as quickly as possible is doing more damage than good?
What if choosing debt reduction over investment, choking off vital services along the way, is causing great harm to the UK?
This is a question that needs to be aimed directly at George Osborne. Why, at a time when we had historically low interest rates, and what the IMF have accurately referred to as ‘ample fiscal space’ (the ability to raise taxes or spend money to reduce the ratio between national debt and GDP), did he not spend more on infrastructure to insure our economy for the future?
Perhaps because the chancellor was in charge of the narrative that said Labour spent too much. For those people who assumed that high public debt would be burdensome on economic growth, and thus the recovery, the IMF had this to say to summarise their position:
“A second rationale for why high public debt needs to be brought down is the belief that high public debt weighs on economic growth.
“While causality runs both ways, an important causal channel is taxation: high public debt implies the need to distort economic activity (labour, capital) to service the debt (either through taxation or cuts in productive spending), which dampens economic growth.
“A reasonable idea is that laying the foundation for sustainable growth requires paying the upfront cost of reducing the debt today.”
It’s this line of argument that had been used by Osborne while not actually following it fully. Under him, public debt has risen. Don’t believe me? Quoth The Telegraph:
“George Osborne has added more to the public debt in 5 years than the previous government did in 13.”
Though the real point here is that the coalition has only cut the deficit by half as a proportion of Britain’s national income.
We must always remember that the coalition’s plan didn’t work; the wizardry of cutting the deficit, while choosing not to take advantage of low interest rates, didn’t come to fruition.
So maybe when Osborne could see this reality, he ought to have changed tack. As William Keegan recently said in his book on Osborne’s time in the last parliament, an honest chancellor would have at least said something.
Instead he held to a view that debt is bad for growth. Full stop. He didn’t explain what that meant because that would have been off-message.
So when someone asks whether Labour spent too much, and whether Osborne was right to bring on swingeing cuts, the stock answer should be the following: paying down national debt might be desirable, but doing so at the expense of taking advantage of low costs for spending and investing may be akin to shooting the whole country in the foot.
What has come about as a result of Osbornomics is a low-wage recovery, where we are all in debt, many of us super-exposed to rising interest rates, and limping along in full knowledge of a missed opportunity on things like infrastructure spending. This does not make for a healthy growth model.
The IMF paper yesterday shows that George Osborne did not hold a monopoly on how best to bring about recovery after an economic crisis. He should read it and weep.
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