The IMF report proved a damp squib for the ‘more, more, more’ crowd who think the Chancellor should attempt to spend and borrow his way back to sustainable growth. Whilst the Fund did advocate re-jigging of spending (bringing forward some capital spending), it largely supported the need for fiscal consolidation whilst advocating measures to raise the medium-term growth potential of the UK economy.
We shouldn’t be satisfied with this very slow growth we are currently experiencing becoming ‘the new normal’. Nor does it have to be if the right policies are adopted, and individuals and businesses are freed to invest and innovate. It’s ultimately productivity improvements from these through which living standards rise.
In this regard there were some eminently sensible suggestions in the IMF’s policy prescriptions. They identified that domestic deleveraging and weak external demand, driven by the Eurozone, are strong headwinds against growth. With much of the banking system still impaired, individuals and businesses see the medium-term outlook as bleak. The Fund therefore rightly emphasises the need for more measures “to raise long-term expectations of potential growth, while rebalancing…to a high-investment and more export-oriented economy,” in order to encourage that return of confidence about the future.
The evening news headlines will obsess over what it had to say on fiscal policy, where the views expressed were extremely nuanced but a far cry from the recent comments from the Fund’s Olivier Blanchard (which suggested the Fund would advocate a significant fiscal loosening). In fact, the Fund correctly acknowledged that the Government had already watered down its plans to close the deficit. As I’ve written before, Plan A was abandoned long ago, with both the aim of eliminating the structural current deficit and for the debt-to-GDP to be falling by the end of this Parliament thrown out since the Autumn Statement in 2011.
Nevertheless, the Fund did suggest that bringing forward capital spending might help both short-term and longer-term growth, by utilising resources and addressing supply-side constraints. I’m less optimistic that politicians choosing infrastructure projects will aid our long-term growth potential, particularly given many policymakers’ obsessions with high-cost energy capacity and grandiose transport projects. Surely if the long-term growth potential of the UK economy was the pre-occupation of policymakers, provisions would already be in place for more air capacity in the South East? There is certainly some public goods and infrastructure provision that could help, but the business cases should be water-tight.
More importantly, the Fund rightly outlined how supply-side and structural reforms could have both positive effects on long-term growth expectations and thus improve the outlook for the health of banks and purchasers of UK debt.
Three particular areas caught my attention. First, they highlighted how lowering marginal effective corporate tax rates and introducing tax allowances for raising equity could help to bring forward investment. The CPS has long advocated and subsequently supported the government in its plans to significantly bring down the rate of corporation tax, particularly given much international evidence suggests the effective tax rate in the UK is very high. In the medium-term, they said this could be funded by broadening the VAT base (surely inevitable in the longer term) and by reforming property taxes (which also seems inevitable, though not in the punitive and highly targeted way advocated by Nick Clegg and co.)
The IMF also rather unusually commented on RBS and Lloyds, which the UK state holds significant stakes in. The Fund sensibly indicated that these should be returned to the private sector “in a way that maximizes the value for taxpayers”. Of course, many of us at the CPS have been suggesting a way to do just that for two years now, and today’s Times quite promisingly suggests that the Prime Minister might be inclined to agree.
Finally, the Fund sensibly suggested that the Government’s Help to Buy scheme would only really achieve its dual goals of reviving housing market confidence and widening property ownership if it was accompanied by measures on the supply-side. It advocated financial disincentives for holding land without development as a way to achieve a supply response. But the real problem, as outlined by CPS Research Fellow Keith Boyfield, is the UK’s archaic planning laws which prevent and delay development from taking place.
All in all then, the report was not the game-changer many neo-Keynesians were expecting, and many of the recommendations were rather predictable. The central thesis was clear though: a fiscal consolidation plan is necessary and supply-side reforms are required to raise the medium-term growth rate of the UK economy. Whilst we would not always agree with all of the exact reforms the IMF have proposed (particularly adoption of Michael Heseltine’s corporatist agenda), there was plenty of food for thought in areas as yet rather neglected by the Coalition, such as tax reform and the need for a clear agenda in re-privatising the state-owned banks.