The IMF faces both ways on the UK economy

The IMF’s latest report on the UK is a Janus-faced document. The Government has pointed to the face that smiles on George Osborne’s deficit reduction plan and calls it “appropriate”. But there’s another face in there too, which should not be ignored.

First of all the IMF staff* diverge  from the Office for Budget Responsibility’s projections that the structural deficit will be gone by the end of the Parliament. As this table (on page 33) shows, while the OBR outlines a cyclically adjusted surplus of 0.3 per cent of GDP in 2014/15, the IMF forecasts a deficit of 0.5 per cent.

That is politically significant because, if correct, it means George Osborne will have less leeway for pre-election tax cuts.

Second, the IMF staff argue that the Chancellor should be ready with a fiscal Plan B if growth does not pick up.

Here’s the key passage:

“If the economy appears likely to experience prolonged weak growth and lower inflation, fiscal automatic stabilizers should operate freely and monetary policy should be kept loose for an extended period. To prevent a downturn from becoming entrenched, additional stimulus may be required from BoE asset purchases and temporary targeted tax cuts, combined with deeper long-run entitlement reform to safeguard fiscal sustainability and market confidence.”

Just to be clear, what the IMF staff are recommending here is not the range of supply side reforms that right-wingers are talking up and calling “Plan A +”. It is not (only) automatic stabilisers like higher welfare payments and quantitative easing which have already been countenanced by Osborne and Vince Cable. No; what they are suggesting could be needed is full-on, short-term, demand boosting, fiscal loosening.

Specifically tax cuts (page 38):

“Tax cuts have the advantage of being faster to implement and more credibly temporary than expenditure shifts. To increase their multipliers, tax cuts should be targeted to low-income households, investment (e.g., temporary investment tax credits, which would also facilitate rebalancing toward investment), or job creation (e.g., temporary cuts in employer payroll taxes to reduce employment costs).”

The later sounds very much like a cut in National Insurance.

So the overall message from the IMF is by no means “all clear” for the Government. It is saying that, if growth falls short, the Chancellor should be prepared to change fiscal course.

And remember: UK growth has not met official expectations so far…

*The IMF “staff” seem to have a different view from the IMF “authorities”, who give their view on page 39 and take a much more Osborne-friendly line.

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