Saturday, August 25, 2012

IMF Advising Against Austerity


Saturday, 25 August 2012

IMF Advising Against Austerity

IMF advises delaying austerity until growth returns

Cutting government spending in a crisis will condemn a country to an even deeper recession and inflict “permanent” damage on the economy, the International Monetary Fund has warned.

Britain's Chancellor of the Exchequer George Osborne
The Chancellor has been told to prepare to relax austerity if the economy does not improve Photo: REUTERS
In a paper that will only add to the pressure on the Chancellor, the Bretton Woods institution urged governments to delay austerity until growth returns or – if a delay was not possible – to shift the burden of any programme onto higher taxes and larger benefit cuts.
The IMF study emerged as official figures showed that the recession in the UK had not been as deep as previously feared. GDP contracted by 0.5pc in the three months to June, according to the Office for National Statistics (ONS), less than the 0.7pc decline initially estimated.
Stripping out the effect of the extra day’s bank holiday for the Diamond Jubilee, the economy stagnated – with growth over the three months estimated at zero.
The IMF paper echoed recent findings by the National Institute of Economic and Social Research that austerity causes more harm in recessions than at times of growth. “If you diet when you are sick, you’ll probably get a lot sicker,” Nicoletta Batini, one of the authors of the IMF report, told the BBC.
She added that every £1 cut from spending in periods of economic strength might reduce national income by 50p “but if you do it at a bad time, it could be £2 or even more than £2 permanently”.
The report, which did not examine the UK situation but focused on the US, Europe and Japan, was an attempt to identify the best pace and structure of fiscal consolidation. While recommending waiting if possible, it accepted that some countries had no choice but to cut their debts.
In that case, the IMF said: “If consolidations need to be implemented during downturns, they should prioritise increases in net taxes.” It defined “net taxes” as both increases in tax and reductions in benefits. By switching the emphasis of the cuts, she said, governments could maintain infrastructure spending.
“These are painful decisions. But abandoning productive programmes destroys jobs while higher [net] taxes do not – at least in the short term,” she said.
Roughly 40pc of George Osborne’s £123bn consolidation plan is scheduled to come from tax rises, benefit cuts, and lower debt interest costs, according to the Institute for Fiscal Studies. The Government is thought to be examining plans for further benefit cuts to redirect the money into infrastructure such as council housing.
Last month, the IMF warned the Chancellor he should relax his austerity programme in next March’s Budget if the outlook has worsened. However, the institution has so far been supportive of the UK policy mix.
The ONS’s decision to revise up its estimate for UK growth failed to restore much confidence in the outlook. The detail provided “further evidence that the purported rebalancing of the UK economy is coming at the expense of growth”, Andrew Benito, a UK economist at Goldman Sachs, said. Net trade deducted 1 percentage point from growth while consumer spending sliced 0.3 percentage points off output.
Steven Bryce, a Credit Suisse economist, said: “This is in line with our view that the UK is currently stagnating rather than contracting.”
Most economists now expect the UK economy to contract this year and for the Bank of England to respond with more stimulus measures. Martin Weale, a Bank ratesetter, said he favoured an interest rate cut over more quantitative easing, if it could be proved rate cuts did not put banks in difficulty.
“If it were clear that the interest rate could be reduced ... without finding some banks got themselves into a position where they had to reduce lending because of the effects of an interest rate cut on their profits, I think I would probably prefer that to more QE, if I was choosing between them,” he told The Herald.

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