The opening lines of the press conference presenting the IMF’s report on the UK economy did not bode well. The IMF’s deputy managing director David Lipton congratulated the government on its labour market reforms. Does the IMF actually know what is going on in the UK?
The government has taken a number of measures to increase the burden of the minimum wage. The list of other labour market regulations the government has brought in goes much further, and the British Chamber of Commerce has calculated that they would cost businesses £22bn in the four years to 2015.
And the same misperception seems to be true when it comes to austerity. Britain doesn’t need to implement policies to offset austerity, as the IMF suggests, because there has been no meaningful austerity. With our underlying deficit above 7 per cent of national income, even John Maynard Keynes would probably have been shocked.
One of the great errors of the coalition was to try to cut the deficit by initially raising taxes. If, instead, we had implemented a rapid programme of deficit reduction, led by government spending cuts, we would be well on the way to rebalancing the economy. Lower borrowing means lower long-term interest rates, less pressure on the exchange rate, and reduced consumer fears about future tax rises.
That is why the evidence is clear that countries on floating exchange rates do not see reduced growth from lower government deficits – as long as reductions are led by spending cuts. Indeed, it will only be when the government stops borrowing that the economy will be rebalanced away from domestic consumption, as the IMF wishes: currently, the government is borrowing and consuming the equivalent of nearly all domestic savings.
It is also difficult to understand where the IMF is coming from when it suggested that the Bank of England could promise to keep interest rates low until the recovery reaches full momentum. Inflation is above target, and has been for 45 months: this is not a short-term blip. If the IMF believes that countries should abandon the hard-won gains of inflation targeting, it should say so explicitly. If our sluggish growth is caused by a weak supply-side, keeping monetary policy loose will turn out to be an historic policy disaster.
There were some interesting and wise words in the IMF report. It suggests that the UK should broaden the VAT base – though, after the pasty tax affair last year, this is hardly likely. The IMF also suggested lowering corporate tax rates further but, given the attitude of politicians towards corporation tax at the moment, this seems equally unlikely. Reform of land taxes was proposed and, without necessarily agreeing with the detail, this is worth considering.
All in all, it is difficult to understand why we should take the view of the IMF too seriously. It proposed some sound policies, some that were based on facts and some that were politically credible. But by and large, few of its policy recommendations fulfilled all three criteria.
This article originally appeared in City AM.