Cash or Credit? UK public spending cuts and the IMF
George Osborne has doggedly fought back at critics of the government’s austerity strategy, repeating the mantra that sustaining the ‘policy credibility’ of UK plc with financial markets and investors is the paramount challenge facing this parliament. This week the Chancellor of the Exchequer has been able to draw on an apparent endorsement from the International Monetary Fund (IMF) for his agenda of public spending cuts and the Coalition's broader economic policy choices. But is the IMF’s ‘endorsement’ all that the Chancellor makes it out to be?
Governments of all political stripes rush to claim credit when international institutions offer praise for their policy choices – and quickly play the blame game if faced with criticism. When it comes to economic policy, the key international institution that can offer a crucial source of political cover – or trim a government’s sails with censure – is the IMF. Despite lacking public support or democratic legitimacy, the IMF’s pronouncements on a country’s economic policy framework can impact upon the government’s overall political fortunes and investor confidence, and influences the public standing of the finance minister in particular. One danger of putting too much stock in the IMF’s pronouncements on the health and future prospects of the British economy based on a single report delivered at a specific stage in the business cycle is the IMF’s poor record in getting the details right in economic forecasting. Much like the problems of accurately forecasting the weather a week in advance, national performance in the world economy can fluctuate at short notice. The challenges of economic forecasting for an international institution like the IMF multiply exponentially during a financial crisis, when a good bet one day can quickly become a rash gamble the next (as the IMF previously discovered in East Asia in 1997).
Beyond the understandable difficulties of achieving accurate economic forecasting and smart policy design during ‘hard times’, the main problem with over-egging the findings of a single report from the IMF on the UK economy lies in the institution’s role. The IMF rates sound money (low inflation) and sound public finances (low public debt / budget deficits) as paramount concerns in its pursuit of global macroeconomic stability. There are obvious reasons for this approach from the IMF’s viewpoint: instability is (usually) bad for business, bad for workers and households, and ultimately bad for a government’s longevity. But this casts the IMF’s ‘concluding statement’ on the performance of the UK economy in a different light to that shown by the Coalition’s bullish Chancellor (read the IMF’s ‘concluding statement’).
Despite the rapid proliferation of headlines proclaiming the IMF’s backing for the Coalition’s strategy, the annual report on the UK economy was not an unqualified endorsement of Osborne’s ‘no turning back’ approach to economic policy. IMF staff identified a range of potential risks to the Coalition’s economic strategy – especially the risk of an increase in long-term structural unemployment – and prescribed possible ‘Plan Bs’ including temporary tax cuts targeted towards investment, low-income households, and job creation policies to stimulate demand. Nonetheless, the statement by IMF staff that the health ‘of the UK financial system is a global public good’ was less about whether the government’s policy choices are best for the welfare of UK workers, households, and businesses, and more concerned with the health and stability of the world economy as a whole (and the institution’s growing focus on ‘spill over effects’ between economies). Rightly so: the IMF has a very different ‘constituency’ it must respond to than democratically-elected national governments. It is in this context that predicted economic growth of 1.5% in 2011 can be described as ‘moderate’ rather than disastrous, and ‘fiscal consolidation’ is linked to ‘preserving confidence in debt sustainability’ rather than preserving jobs, consumer demand, and the quality of the country’s public services. As often proves to be the case, what matters most here is what is not being said out loud: the confidence of financial markets and credit rating agencies at the big end of town outweighs the importance of maintaining people’s confidence in their job prospects, financial security, household living standards, and the future quality of public services. On this, the IMF and the Coalition implicitly agree (both would argue that the former is a prerequisite for attaining the latter). Yet while the IMF’s job is to safeguard global economic stability, the government’s job is to choose an economic strategy that safeguards the welfare of the British public.
Dr. André Broome
Senior Lecturer in International Political Economy in the Department of Political Science and International Studies. He is also the author of The Currency of Power: The IMF and Monetary Reform in Central Asia.