We shouldn’t take the IMF’s views on the UK too seriously

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.

So the conclusion is simple: We cut the deficit instantly and we rack up interest rates. You're bonkers. Why no hard data? Again? Maybe because a comparison with France's deficit reduction programme over the last two years doesnt make happy reading for your suggestions. Faster deficit reduction achieved in an equally slow economy through tax increases. Ideology. Gotta love it. Shame about reality.
I think you should read the piece again. I did not suggest "racking up interest rates" just that we should not promise to keep them at a certain level until a growth target is met. I did not suggest cutting the deficit instantly (after all, it is now five years since the crisis) but there is no shortage of data that suggests that indebted countries with well developed capital markets benefit from cutting deficits (but not necessarily if it is led by tax increases). The reality is a stagnant economy after five years of more-or-less record borrowing. Where is the evidence that even higher borrowing would have increased growth more rapidly? Japan?
Entirely sensible commentary, as usual, Philip. One wonders how the Labour Party has been able to get away with its "cutting too far and too fast" criticism when, in fact, the truth was more like "raising taxes too far and too fast". There was a valid criticism that Labour could have made about the negative effects on the recovery of raising taxes first, but it chose to make exactly the wrong criticism. One point on the "hard won gains of inflation targeting". I wonder whether these gains were as great or as hard won as is supposed. Because the targeting was based on consumer prices, inflation in both asset prices and in the public sector was entirely ignored. In reality, we had inflation - it was just missed at the time and inflationary booms are inevitably followed by busts, as we have seen in recent years. Now we perhaps (I don't know) have less inflation than we realise (because public sector costs and asset prices are rising far more slowly than before).
HJ - your point may be right about inflation targeting (there is legitimate dispute about including asset prices but it was very silly to explicitly remove housing costs). Another point on that issue was that, because of globalisation, there was downward pressure on consumer prices because of a positive supply shock and you can certainly argue that the Bank should have a target where it ignores positive (and negative) supply shocks - we should allow prices to fall if it is happening because of a supply shock.
Philip, what is your view about the exclusion of public sector outputs from the inflation measure? I realise that these outputs are generally not explicitly priced, but we are still paying for them and, in other circumstances, education, medical services, etc. could easily be items which are generally priced in the market. There is much evidence, of course, that, during the Labour years in particular, the inputs increased much faster than outputs, which means there was effectively substantial inflation in the cost of these services, which was missed by consumer price index targeting. I suspect that this was an important contributory factor in the extent of the UK's boom and us suffering more than most in the subsequent crash.
I think my considered opinion is that "I don't know" but probably they should be. The disadvantage is that the more of the inflation index is determined by government (and there are also administered prices in the utilities, of course) the more possibility there is of manipulation.

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