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Why the significance of yesterday's IMF intervention shouldn't be overstated

By Peter Hoskin
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Much ado about the International Monetary Fund’s World Economic Outlook report, which was released yesterday. It’s not so much the fact that they’ve downgraded their growth forecasts for the UK, to 0.7 per cent for this year and to 1.5 per cent for next – we’re used to that. It’s more what they say about deficit reduction. “Greater near-term flexibility in the path of fiscal adjustment should be considered,” reads the report, “in the light of lacklustre private demand.”

So far as this recommendation is significant it’s because it adds to the forlorn chorus encouraging George Osborne to consider a different approach. Not only do we have Ed Balls and Vince Cable, we now also have the International Monetary Fund. And it’s a body that wears its historic importance heavily. No wonder the newspapers – and the Labour party – are getting excited.

But the significance of the IMF’s intervention shouldn’t be overstated, and for three main reasons. Here they are, briefly:

  • An inconstant compass. Guess which organisation spoke of the “credibility” afforded by the UK’s spending cuts, last year? Guess who said, in 2011, that “strong fiscal consolidation … remains essential”? Or, in 2010, claimed that Mr Osborne’s plans were “appropriately ambitious”? Yep, don’t you just know it: the IMF. This isn’t to say that their views should be ignored, just because they may have changed. But we shouldn’t pretend that they are a firm compass, always pointing in the right direction.
  • Advice that’s already being acted upon. Besides, it might be argued that, despite Mr Osborne’s continuing emphasis on the importance of deficit reduction, the Government is already weaving some of that IMF-backed “near-term flexibility” into its plans. Not only has the Chancellor stretched his fiscal rules to breaking point instead of implementing further spending cuts and tax rises, but his last two financial statements have included measures to boost capital spending. Indeed, one of the most important shifts in this Government’s thinking has come over capital spending. There’s a growing belief on Downing Street that they shouldn’t have emulated the pace of Alistair Darling’s proposed, original cuts.
  • And what about the smaller numbers? A point I’ve made before, including in this recent post: focussing on the big forecasts from the big forecasting bodies can lead us to neglect the smaller numbers that often matter just as much. Parts of the UK have been in recession for decades, yet the fury and bluster seems to be held back for when bodies like the IMF change their predictions by a few fractions of a percentage point.

There is one wider lesson for George Osborne in yesterday’s report, however: never place too much stock in the judgements of external organisations, be they monetary funds or credit-rating agencies. They can look favourably on politicians’ efforts sometimes – but, crucially, they can also change their minds.

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