The International Monetary Fund (IMF) has backed the Government’s austerity programme and rejected calls for higher spending, borrowing and debt. It called the deficit reduction programme ‘essential’, praised the UK’s fiscal and monetary positions as ‘appropriate’ and recommended that any increase in the deficit in the event of deteriorating macroeconomic conditions come in the form of tax cuts rather than raising spending.
In a press conference on the preliminary findings of its staff ‘mission’ to the UK, the international finance organisation’s findings have lent weight to arguments for fiscal prudence and given a blow to those proposing a ‘Plan B’ of higher spending and larger structural deficits.
“the weakness in economic growth and rise in inflation over the last several months was unexpected. This raises the question whether it is time to adjust macroeconomic policies. The answer is no as the deviations are largely temporary. Strong fiscal consolidation is underway and remains essential”
They also supported the Government’s spending-led fiscal consolidation, noting that there have already been ‘large indirect tax hikes’ and citing:
“Evidence suggests that spending-led consolidations lead to longer-lasting budgetary improvements”
The problem isn’t that the Government is cutting too fast. The proposed cuts, which still have not started yet, are already very modest. They’re only cutting by 3.7 per cent in real terms spread over 4 years, compared to Obama’s plan to cut by 3.8 per cent in one year alone. The problem is they’re not cutting enough. Taxes are too high and are stifling enterprise, growth and prosperity. But we also have an alarmingly high public sector deficit that we need to close urgently if the British Government is to retain its credibility and be able to continue to borrow money in the markets at affordable rates. We need to both cut taxes and cut the deficit and the solution is obvious. We need to cut spending faster and deeper than George Osborne has proposed. As I wrote yesterday, the World Economic Forum rates British Government spending as in the most wasteful and inefficient half globally. International aid, payments to the EU, vanity projects like High Speed Rail, non-jobs like diversity, political and climate change officers: there is no shortage of spending cuts ordinary people would barely notice.
Planning reform isn't on track
The Fund also praised efforts to ease tight planning restrictions, saying they could ‘help spur more construction and productivity-enhancing growth’. But, as City AM Editor Allister Heath pointed out yesterday, the moves in this direction have run out of steam while the need for reform is urgent. Getting back on track with this, together with abandoning archaic Sunday trading laws and halting plans to introduce new labour market regulations would make for three easy pro-growth policies to support tax and spending reform.
It also has a prescription ready in the event of prolonged weak growth and high unemployment, and its “Plan B” is very different from the one touted by the likes of Ed Balls and David Blanchflower:
“tax cuts are faster to implement and more credibly temporary than expenditure shifts and should be targeted to investment, low-income households, or job creation to increase their multipliers. Simultaneous adoption of deeper long-run entitlement reform would be desirable to safeguard fiscal sustainability and market confidence.”
The prescription is a sensible one, but we shouldn’t wait for an economic deterioration to implement tax cuts. Boosting productivity through carefully designed tax cuts, balanced by deeper cuts to spending and waste and augmented by tax simplification and the kind of planning and Sunday trading reforms Allister Heath proposes are just the kind of supply-side we need to improve our economy right now.