Bill Jamieson: Carte blanche for George Osborne U-turn
WHAT a friend George Osborne has in the International Monetary Fund – though it doesn’t appear so at present. Last week it delivered what many would regard as an unambiguous stab in the back for the UK government’s economic strategy. But this autumn it is more likely to prove the best “get out of jail” card ever sent to a British Chancellor.
It is certainly true that over the past 40 years, the one charge that could be safely levelled at the IMF was the predictability of its strictures. Well before it had spoken, our lips had already moved. Barely a year went by without admonitions to the UK to exercise more discipline on public expenditure and the need to retain ceaseless discipline on inflation.
This advice continued into the first 18 months of the Coalition government. Osborne could reliably count on strong IMF endorsement of his deficit reduction programme. Not only was the five-year deficit cutting strategy held to be the best route by which the UK economy could return to sustainable growth, but it was also seen to be the best course by which the UK could retain its coveted Triple A credit rating.
This external endorsement, from the highest of international authorities, was seized upon by the Coalition. Time after time in the Commons, Osborne was able to rebut the “too far too fast” critique from Ed Balls with supportive quotes from the latest IMF assessment.
What a fickle friend the IMF has now turned out to be. Not only has it levelled the charge that tax rises and spending cuts in the UK since early 2010 have cut growth by a total of 2.5 per cent, but it has also proffered advice quite contrary to its previous admonitions: the government should slow the pace of budget cuts next year.
Labour and the SNP have lost no time in urging Osborne to embark on major infrastructure projects to haul the economy out of recession. First Minister Alex Salmond must be tempted to offer IMF managing director Christine Lagarde the Honours of Scotland or at the least a pair of scissors to cut the ribbon on dualling the A9. But the finer embroidery of her advice may be less welcome at Bute House: she recommends temporary tax cuts if growth does not pick up and more means-testing of benefits. The Left of Centre SNP has no sympathy for either course.
It is certainly true that the outlook for the UK economy has deteriorated markedly since the IMF forecasts last year. So to the charge of inconsistency, it could invoke the apologia of Maynard Keynes: “When the facts change, I change my mind. What do you do, sir?”
But some facts about our condition have not changed. Indeed, looking at the latest figures on the public finances it is evident that whatever is ailing the UK economy, it is not an over-aggressive rate of deficit reduction. Figures for June show the Public Sector Net Borrowing Requirement rose to £14.4 billion, up from £13.9 billion a year earlier. For the first three months of the financial year the deficit has risen to £42.9 billion compared with £38.4 billion in the previous corresponding period. There is an underlying rise of 11.7 per cent compared with a targeted drop of around 4.5 per cent for the year as a whole. On current trends, the PSNBR is on course to hit £140 billion for the financial year, some £20 billion above target.
This cannot but put a question mark over the implications of the IMF medicine. What it is advising in effect is not just that the government should continue to breach its own deficit reduction targets but that it should breach them by some even greater – and conveniently unspecified – amount.
This could be viewed as a measure of the depth of the policy crisis that hitherto authoritative policy institutions are now in. We have cut interest rates to ultra-low levels and held them there for the longest period in more than 300 years yet the economy has failed to respond. The central bank has injected some £325 billion of monetary stimulus – and with results far short of those expected. Another £50 billion of quantitative easing is under way and there is every expectation of the total being raised to £500 billion by the year-end.
Now hopes are pinned on a major new Funding for Lending Scheme to induce the banks to lend to business. Pressure is also being applied to accelerate infrastructure spending by means of government financial guarantees to help encourage private sector funding. Thus we are now at, if not over, the edge of the known universe in macro economics. Whether we view policy now as inspired guesswork or reckless gamble matters less than that we have exhausted conventional remedies and are now without evidence or precedent to guide policy.
If all this stretches public confidence in the strictures of the IMF, imagine the difficulties now faced by Osborne. He is being asked to abandon the central pillar of the Coalition’s raison d’etre. And once that goes, the UK’s Triple A rating would surely not be far behind. It is surely an impossible U-turn for the Chancellor to undertake without a devastating loss of credibility.
But here Lagarde may have slipped him an ace. Faced with growing speculation over his future as Chancellor, he could now turn the tables on his opponents by declaring that he fully means to take the changed advice of the IMF to heart, a course he has no option but to follow given the every prospect of continuing recession in the Eurozone, clear evidence of economic slowdown in China and mounting concerns over the ability of the US to sustain its own economic recovery in the face of an unavoidable budget squeeze after the presidential elections in November – the dreaded “fiscal cliff”. How could it be seen as a U-turn when Lagarde has given him the equivalent of a free pass?
But politics is unforgiving. And even IMF validation of a change of direction may not be enough to sustain credibility in a Chancellor who has set so much store by a deficit reduction strategy he extolled as the prerequisite of recovery. The intensifying debate this autumn may thus be whether Prime Minister David Cameron will stand by Osborne, or use “changed circumstances” as an excuse to swap the Foreign Secretary and the Chancellor – William Hague to change places with Osborne.
Hague is a senior and experienced figure, performs well in the Commons, does not suffer the stigma of a privileged background and has that most underrated of political gifts – a sense of humour. He could make a virtue of temporary tax cuts without previous reluctance being quoted back at him.
The danger, of course, is that such a change may be seized upon as a Great Escape for spending departments and public sector unions. Free at last? Nothing would more quickly bring the IMF back to its favourite old tunes.