What goes around, comes around. Hard though it is to believe, one of the architects of Britain’s economic catastrophe, Ed Balls, will soon be able to claim official validation for the looser fiscal strategy he has been advocating since losing power three years ago.
In their annual health check of the UK economy, due to be released on Wednesday, International Monetary Fund officials are expected to go along with the criticism of the Government’s deficit reduction programme recently voiced by their chief economist, Olivier Blanchard, though they might phrase it more diplomatically. It would indeed be pretty odd if they didn’t, for it would leave the IMF even more open than usual to the charge of mixed messages.
Not that it matters. As ever, the IMF is somewhat behind events. To be advising that the UK should be going slow on fiscal adjustment in response to slow growth, when in fact it has been going slow for nearly two years now, and to be giving such advice just as the economy starts picking up, demonstrates curiously muddled thinking, to put it mildly.
When George Osborne became Chancellor, the IMF praised his plan for correcting the public finances from the rooftops, and even as recently as last year, Christine Lagarde, the IMF’s managing director, said she “shuddered to think” what would have happened had it not been implemented.
However, beneath the surface, the IMF has been gradually shifting its position from an overtly “fiscal consolidation good” to a more nuanced “let’s worry about the fiscal consolidation later after the growth has returned” approach. Unless there has been some blinding flash on the road to London, the IMF is this week expected openly to back the latter, “give growth a chance” advice. This will be music to the Opposition’s ears. Already at war over Europe and gay marriage, the Government’s economic strategy would seem dead in the water, too.
Yet whatever the political ramifications of the IMF’s musings, they are likely to be of zero economic importance, and that’s not just because the Chancellor will politely ignore anything that’s said. Nobody expects the IMF to advocate an outright discretionary fiscal stimulus – if it does, that certainly would be a surprise – so the argument is really about quite marginal differences in the speed of the consolidation.
Osborne has been such a keen advocate of austerity that he cannot politically admit to anything else. Yet in reality, he’s quite substantially shifted his fiscal stance over the past two years, and has therefore already done much of what the IMF seems to be calling for.
Lack of growth has automatically slowed the pace of consolidation to “just” 1pc a year, which is about middle of the pack for fiscally challenged advanced economies. Abandoning the debt target has also allowed the Chancellor to recalibrate the consolidation, pushing a chunk of as yet unspecified spending cuts into the next parliament so as to give space for some minor tax cutting before then.
What is more, the Funding for Lending and Help to Buy schemes amount to a fairly substantial, off-balance sheet stimulus. Professor Blanchard was apparently unaware of these initiatives when he made his remarks, even though they had been announced by then.
In any case, the Chancellor got his retaliation in early at last week’s CBI annual dinner. If we’d had more accommodative fiscal policy, he pointed out, it would only have been offset by less supportive monetary policy; regardless of what the IMF says, the independent Office for Budget Responsibility had found no evidence that austerity has reduced growth by more than was expected; the shortfall is better explained by the damage to demand from higher commodity prices in conjunction with the eurozone crisis than fiscal consolidation; and so on.
In truth, Osborne is already on much the same wavelength as Blanchard, though for somewhat different reasons and he certainly won’t concede it. Slow growth has forced the Chancellor to delay large parts of the planned consolidation in exactly the way Blanchard advocates. Indeed, the two seem as confused as each other.
Osborne preaches austerity while simultaneously practising an admittedly inherited but so far largely uncorrected extreme form of deficit spending; Blanchard, meanwhile, advises fiscal laxity in Britain while being party to fierce fiscal austerity in the depression engulfed eurozone periphery. At best, his strictures are guilty of intellectual inconsistency.
This is perhaps unsurprising given all the noise. The sound of intolerable austerity is heard echoing all around Whitehall in response to the latest spending round. This is because what cuts there are tend to get focused on comparatively small areas of public spending.
The big spenders, together with one tiddler – health, pensions, education and overseas aid – are either ring-fenced or in some other way effectively protected. The result is that there are screams of very real pain from some departments for very little in the way of overall gain.
Why, you might ask, is disposable income and consumption rising at a time when private sector earnings are being squeezed by high commodity prices? One of the primary reasons is that benefits were indexed to inflation last year (though not any more). The Government has successfully managed to mothball the last aircraft carrier, but the leviathan of entitlement spending continues unchecked.
And Professor Blanchard wants Britain, with the highest deficit in Europe, to do more of this nonsense?
Democratically elected governments in ageing societies find it very difficult to resist the pressure for ever more spending on health and pensions (see charts above for UK projections). The Junker curse has it that politicians know what needs to be done; they just don’t know how to get re-elected after they’ve done it. So they tend to duck serious structural reform, and prioritise spending on the past over investment in the future.
The Government’s cutbacks might seem harsh, and in some instances, they indeed are, yet in overall terms they are staggeringly unambitious. Even after the current fiscal consolidation is complete, well into the next parliament, government spending is returned, at around 40pc of GDP, only to where it has been over much of the post-war period. Yet unfortunately, there will be little left for anything else after paying for rising health care, pensions and debt interest costs.
This is a potentially disastrous position for any nation to find itself in. Eventually the country won’t be able to afford a standing Army, let alone its own nuclear deterrent. We could tax more, say some, yet research as Simon Walker of Henderson Global Investors points out, Britain has never tolerated a tax burden of more than 36pc (excluding North Sea oil revenues) of GDP on a sustained basis. The nation would only be undermining its future to tax more. Britain already faces a sea of troubles. It scarcely needs the IMF, with its fantasy economics, to make matters even worse.