The IMF reveals Britain’s shadow fiscal stimulus
One decision towers above all the chaff about pasties, grannies, jerry cans, charities, tycoons and privatised roads. It was the decision made by the Chancellor last November to respond to a marked decline in the outlook for the UK economy by stretching austerity out two years.
Why bring that up now? Well today the IMF published its World Economic Outlook and fiscal monitor. On the economy there was a small upgrade to growth prospects this year, now 0.8% rather than 0.6%. But the striking difference in the IMF’s fiscal monitor was to Britain’s borrowing.
In fact, since the last assessment in September, Britain has added the most to its IMF-projected deficits of any major economy or bloc, that the IMF lists in its main table (the advanced economies and the BRICs). At 6.6% and 8% of GDP in 2012 and 2013, Britain’s projected “overall fiscal balance” has surged 0.9% and 1.5%.
Yet, miraculously, our government debt continues to trade as a safe haven, as the IMF confirms. This is an amazing “confidence trick” in the truest sense of the words. In spite of significantly extra borrowing, markets are not punishing Britain with significantly higher interest rates (though the rates have gone up a bit).
This is the Osborne premium. The bond markets believe him, and his plan, even though it doesn’t actually seem to be working. Not yet, anyway. In actual fact Britain has increased the amount it has had to borrow since September, more than any major economies, many emerging ones and even Spain (just). Yet no market response. You can start to see why France got so indignant last year.
The Chancellor and the Treasury would argue vehemently that this forecast extra borrowing is not a “stimulus”. Indeed, when the IMF says that countries with fiscal space should engage in “balanced budget fiscal expansions” (ie tax more to spend on infrastructure), the Treasury argues that the IMF is not talking about Blighty.
A reasonable observer might argue that record lows in borrowing costs means you have “fiscal space”. But, what the Treasury argues is that the IMF always said that Britain should be nimble in the face of a downturn, and should allow “automatic stabilisers” to fire if growth disappoints. This basically means allowing tax rises to fall with a downturn and benefit bills to rise.
This has already happened in Britain. It is a form of stimulus, but the Chancellor would never describe it as such. As it is contained within the framework of the deficit reduction plan, it’s apparently fine. Perhaps we could call it a “shadow stimulus”.
The conundrum here is this. Borrowing more, in a passive, unplanned way, to fund extra benefits is deemed to be an “automatic stabiliser”, and therefore fine. But borrowing more to, for example, actively make good our considerable infrastructural deficit, is frowned upon and might “scare” the markets.
The policy implications here are quite interesting. The markets can take this level of borrowing, and apparently sustain the AAA (of course we knew that already, and that’s down to a credible plan, massive bond purchases by the Bank of England, and our 14 year debt maturity).
If growth does disappoint, does the Coalition really want to spend borrowed money on passively accommodating extra benefits? Or should it strategically plan to spend more to boost private sector job creation (some of the £200bn in infrastructure investment that the government says is needed over the next five years, but that is being offered out to foreign Sovereign Wealth Funds).
The Conservative Right might say, “don’t increase benefit spending, even in a downturn, spend the money helping to provide infrastructure that helps business create wealth”. The Opposition might argue that if the Government had supported demand in the first place, it might not have to borrow more to cope with the costs of economic failure.
Either way, should our spending priorities and economic strategy be determined by what qualifies as an “automatic stabiliser” and is therefore deemed to be market friendly?
A footnote: a fascinating table in the IMF fiscal monitor suggests that Britain’s debt position is not as bad as it seems, because you could choose to net off the government bonds held by the Bank of England as a result of QE. In that case, 2011 “net consolidated government and central bank debt” in UK was just 60% vs 78% (in Spain it’s 31.1% vs 56%, Ireland it’s 20% vs 95.9%. So is the IMF advocating the printing presses on a day when inflation in the UK remained stubbornly sticky? Well, no. But it is rather telling that the IMF (“It’s Mostly Fiscal”) is trying to play down rather than play up the need for global austerity.
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