The IMF plan to revive the economy doesn’t go far enough


by Duncan Weldon    
9:10 am - May 23rd 2012

      Share on Tumblr

I’m still working my way through the IMF’s thoughts on the UK economy. But so far I’m inclined to agree with Larry Elliot’s take at the Guardian:

The IMF says plan B should involve the Bank of England cutting interest rates from their already record-low level of 0.5% and chucking some more newly minted money at the economy through the process known as quantitative easing. Only if that fails to do the trick does the Fund think the chancellor should resort to fiscal policy – decisions affecting tax and spending – to boost demand.

As far as the Fund is concerned, deliberately increasing borrowing in an attempt to stimulate demand is plan C not plan B.

The IMF is advocating a monetary stimulus first, followed by (if that doesn’t do the trick) a fiscal stimulus. And their preferred form of fiscal stimulus would be an increase in investment funded by cuts/tax rises elsewhere.

All very interesting, but I was somewhat surprised that the IMF argued for monetary stimulus first over a fiscal stimulus.

I’d argue that a monetary stimulus can certainly be helpful but at a time when the banks aren’t lending and the monetary transmission mechanism is broken there is always the worry that it fails to address the challenges in the real economy whilst boosting activity and profits in the financial sector (Aditya Chakrabortty’s column in today’s G2 is very good on this phenomenon).

But at least the IMF has implicitly, by recommending one over the other, recognised that monetary and fiscal stimulus are not the same thing (even if I disagree with them on which is more useful in the short term). This recognition is sadly lacking from much of the current government’s rhetoric.

George Osborne is fond of arguing that his tight fiscal policy allows the Bank of England room for monetary stimulus. The government seem, again implicitly, to argue that monetary and fiscal stimulus are close substitutes for each other. It doesn’t matter if the government is cutting back as the Bank can extend support.

Even in ‘normal’ times fiscal and monetary policy will impact upon different sectors in a different way.

Yes, any active policy to increase demand is to be welcomed at the moment – but we shouldn’t pretend that monetary easing will automatically offset fiscal tightening.


A longer version of this post is here

    Share on Tumblr   submit to reddit  


About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
· Other posts by


Story Filed Under: Blog ,Economy

Sorry, the comment form is closed at this time.


Reader comments


1. Thomas Hobbes

A socialist who agrees with the Guardian and thinks that the economy will be fixed by borrowing and printing more money? Witness my shock!

@1

As opposed to……. ? Ah yes let’s see, how long is it going to take all the Tories and Libertarians to crawl out of the woodwork and tell us why they think it is right for the poor to bear the brunt of the austerity caused by their slavish following of the failed Plan A, because really… there isn’t any alternative.

Yeah, right… stun us with another.

3. So Much For Subtlety

2. Galen10

As opposed to……. ? Ah yes let’s see, how long is it going to take all the Tories and Libertarians to crawl out of the woodwork and tell us why they think it is right for the poor to bear the brunt of the austerity caused by their slavish following of the failed Plan A, because really… there isn’t any alternative.

Yeah, right… stun us with another.

Since when has anyone slavishly followed Plan A? Assuming you mean austerity. What is the budget deficit? Is it still measured in the hundreds of billions of pounds?

However there is a better solution – tax cuts, reduce spending and pay off debt. This is what Sweden has been doing. We should all copy the Nordic states right? Their economy is growing at 4.5% I believe. That sounds too high and should be wrong, but that is what I remember. The poor have nothing but to gain from higher economic growth.

Even if cut we spending, the poor would not be bearing the brunt of anything. They would simply be getting what they deserve as their share of the economic value produced in this country. The extra welfare we give them is unearned gravy.

@2 SMFS

The Coalition, and those economists who support its policies, have been banging on for the past 2 years that there is no alternative to Plan A, that only austerity, swingeing cuts and a very rapid action to tackle the deficit was a sane choice. Anyone who disagreed was labelled a deficit denier, irrespective of their “actual” views.

You don’t have to be (pace TH’s post @1) to be a socialist exponent of printing money and borrowing more to think that Plan A was wrong, and to take some satisfaction from pointing out that it has demonstrably failed.

Of course the poor will be bearing the brunt, as they always will in such situations where the elites frig the system to ensure that they don’t suffer. As the Greek and French electorates have shown, they are unconvinced by the line being pedalled by the advocates of austerity and Plan A, because it isn’t delivering growth…. quite the opposite in fact.

5. Northern Worker

I’m not sure I understand this IMF stuff, incidentally recommended by a lady who almost brought France to its knees. Is the IMF saying we should do more of what we have done – low interst rates and QE? Or is it saying we should follow the Japanese model – you know, grand state projects, zero interest, print money, reduce taxes? As this stuff clearly doesn’t work, because it’s been tried and it didn’t work, what is their evidence that it will work this time?

6. So Much For Subtlety

4. Galen10

The Coalition, and those economists who support its policies, have been banging on for the past 2 years that there is no alternative to Plan A, that only austerity, swingeing cuts and a very rapid action to tackle the deficit was a sane choice. Anyone who disagreed was labelled a deficit denier, irrespective of their “actual” views.

They may be saying it but they have not been doing it. Which makes their policies even dumber. They are not imposing austerity. They are not cutting. Not swinging cuts, not even little cuts. We are continuing to spend vastly more than we take in in tax. If they know this is wrong, and it is, then they are all the more culpable for doing it. But doing it they are. Cutting they are not. The 2012 Budget planned for a £90 billion increase in the deficit. That’s about £1,500 for every man woman and child in these British isles. Money that will have to be paid back one day. But of course it was too optimistic.

We will see if we will overspend by as much as we did last year – they budgeted for a deficit of £121 billion last year. Our national debt now stands at about £1.5 trillion or so. Not quite sure, but in that area. And the costs of paying that off are roughly equal to the entire Defence budget. That’s a lot of money which could have and should have been used for something better.

You don’t have to be (pace TH’s post @1) to be a socialist exponent of printing money and borrowing more to think that Plan A was wrong, and to take some satisfaction from pointing out that it has demonstrably failed.

We have not tried it. So we don’t know. Sweden did. It is working there.

Of course the poor will be bearing the brunt, as they always will in such situations where the elites frig the system to ensure that they don’t suffer. As the Greek and French electorates have shown, they are unconvinced by the line being pedalled by the advocates of austerity and Plan A, because it isn’t delivering growth…. quite the opposite in fact.

The Greeks have at least made a pathetic effort at austerity. But it is irrelevant whether the Greek voters like it or not. They produce like Bulgaria but spend like Sweden. No one is willing to lend them the money to go on doing so. They have splurged on their credit cards, defaulted, and now have to face reality. Whatever they do, whoever they vote for, they cannot escape the reality that they cannot spend German money to consume more than they produce indefinitely. The French will have to learn the same lesson.

However the poor are not carrying the brunt. They too are facing a reality that they cannot live like Kings while producing little or nothing. The Greeks have run out of German money. The British poor are running out of Middle class money. It is not suffering to be paid what you produce. It is a false sense of compassion to give them more than they produce. We cannot afford it indefinitely.

7. MarkAustin

So Much For Subtlety is right in saying that Government debt is not falling (much), but wrong to infer from the that cuts have not been made. It is perfectly possible, if you follow the inane policies of this Government to have quite savage cuts without seeing a fall in Government spending.

This Government killed the recovery stone dead: consequently as they cut, tax revenue falls, spending (largely welfare) rises—as is inevitable in a reccession.

Keynes must be spinning in his grave: “if you look after unemployment, deficits will look after themselves”

Wouldn’t the Bank of England have more control of inflation if they could ‘target’ where there interest rates will benefit ? If they could devise a differential lending rate for business money and personal loans, they would have two hands on the reigns of the economy instead of the present blunt instrument that they use at the moment.

With a differential lending rate we could effectively subsidize business, keeping people in work and lessening the need to lower mortgage rates because more people will have wages to pay their bills.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    The IMF plan to revive the economy doesn't go far enough http://t.co/pMdsNgUu

  2. Arun Mehta

    Duncan Weldon: "The IMF plan to revive the economy doesn’t go far enough." http://t.co/ZmDD6Tds

  3. leftlinks

    Liberal Conspiracy – The IMF plan to revive the economy doesn’t go far enough http://t.co/ovfLkJI6

  4. Jason Brickley

    The IMF plan to revive the economy doesn’t go far enough http://t.co/WTRQ1gFm

  5. Jason Brickley

    The IMF plan to revive the economy doesn’t go far enough http://t.co/WTRQ1gFm

  6. Jason Brickley

    The IMF plan to revive the economy doesn’t go far enough http://t.co/WTRQ1gFm

  7. Lanie Ingram

    The IMF plan to revive the economy doesn't go far enough http://t.co/pMdsNgUu

  8. BevR

    The IMF plan to revive the economy doesn’t go far enough | Liberal Conspiracy http://t.co/vHsd7Oj5 via @libcon





Sorry, the comment form is closed at this time.