George Osborne’s austerity agenda continues to come under scrutiny from some authoritative voices, none more so than the International Monetary Fund (IMF) which visited the UK in May 2013 to conduct its annual ‘policy health-check’. Their conclusion was that the country “remains a long way from a strong and sustainable recovery”. What is immediately interesting politically is that the government and opposition completely disagreed on what this actually meant.
This post summarises the views of leading political economists based at the University of Warwick on what the IMF really thinks about the UK’s economic policy – and there are links to videos of André Broom, Ben Clift and Matthew Watson outlining their thoughts in greater depth.
The Treasury argued that the verdict confirmed they were on the right path and “slowly but surely fixing this country’s economic problems”. Meanwhile Ed Balls, the Labour Party Shadow Chancellor, said that: “These downgraded growth forecasts are yet another damaging blow to a downgraded Chancellor, whose economic policies have totally failed”.
One reason political elites were able to interpret the IMF’s findings differently was because of the technical and ambivalent way in which they were written. As Dr André Broome reveals in an online interview, you’ll hardly ever find the word ‘austerity’ in IMF reviews or see direct criticism of government policies. This is because formally the IMF has to remain apolitical, “so it uses language which maintains the fiction that it is not getting involved in domestic affairs”.
An example of this was its assessment of the government’s new ‘Help to Buy’ scheme, which the IMF said could “boost confidence in the housing market” but that needed to be accompanied by “fiscal disincentives for holding land without development”. In other words, what the IMF was really saying was that to avoid another housing bubble, the government should tax property developers sitting on idle land to make them build houses before prices over-inflate.
Arguably the biggest ‘hidden criticism’ of the UK’s austerity agenda was the insistence that more could and should be done with fiscal policy. According to Professor Ben Clift, “There is a growing realisation within the IMF that monetary policy is doing all it can. Interest rates are near zero and private sector investment is still low”. The IMF has also evolved intellectually from the days when it would espouse the infamous ‘one-size-fits-all’ structural adjustment policy package. “It now uses the term ‘fiscal space’ to differentiate the capacities of countries to engage in government spending”.
Based on the UK’s accounting credibility, its debt maturity rates, and its welfare commitments, the IMF concluded that the country does indeed have a significant amount of space in which to introduce new fiscal measures. The most useful of these would be targeted, temporary social spending. This is money directed toward the poorest in society on a short-term basis, since these are the people most likely to spend their additional income and thereby kick-start economic growth. And as Professor Clift warns: “If the economy is not growing, then market credibility and business confidence will not be forthcoming – austerity or no austerity”. The reluctance of the credit rating agencies to restore UK government bonds to triple-A rating is just one example of the waning influence of belt-tightening rhetoric.
But the suggestions of the IMF appear to have gone unheeded. Professor Matthew Watson believes that this is because George Osborne is “in too deep” with his austerity agenda. “To move from this now would be to admit mistakes, in effect, signing your own death warrant as Chancellor”. And there do seem to be mistakes aplenty. Most notably, despite the rhetoric of debt reduction, since George Osborne assumed the position of Chancellor in May 2010, hundreds of billions of pounds have been added the UK’s national debt. But for Professor Watson, this just tells us what we should have known about austerity all along: it is not about public finances but about social engineering. “The crisis has been appropriated to do a lot that Osborne would have wanted to do anyway, such as reforming welfare benefits and couching this in terms of character”. One only has to think of the seepage into political discourse of the dichotomy between ‘strivers and skivers’ to realise how pervasive this has become.
From this point of view, austerity in the UK has become a game of brinkmanship, pushing the economy to the verge of disaster in order to achieve political ends. And so although the IMF’s advice appears to have been ignored, by sending yet another warning to policy-makers, business leaders and rebellious backbench Tories concerned that the Chancellor’s policies are losing them electoral appeal, it may have brought the final judgement on austerity – and on George Osborne himself – a little closer to denouement.
Low growth and rising debt: the record of George Osborne since May 2010:
This post originally appeared on 1 August 2013 on the ToUChstone blog.