The IMF is right to back UK austerity
IT shouldn’t have come as a surprise that the IMF as well as other international bodies have given George Osborne’s austerity plans the thumbs-up. All over the world, profligate nations are working on policies to rein in spending and reduce their budget deficits; those that are failing to do so are finding it increasingly difficult to convince those with funds to lend to continue to prop them up. There is no viable alternative to reducing the budget deficit – reversing course and borrowing even more just isn’t an option. No government can force foreigners to lend to it. No wonder the IMF made it clear yesterday that any Plan B should actually involve cutting spending faster (it highlighted entitlements, such as benefits); cutting taxes temporarily on the poor, investments and jobs; and engaging in more quantitative easing. Whatever one thinks of these ideas, they are very different to spending more, taxing the City more or borrowing more. The only viable Plan B entails more cuts, not fewer.
To see why, look at history. The chancellor will be cutting total, real terms spending by just 0.6 per cent in 2011-12, followed by 1.1 per cent in 2012-13, 1.3 per cent in 2013-14 and 0.8 per cent in 2014-15. Overall, spending will be reduced by 3.7 per cent – assuming that the economy behaves the way he hopes, that interest payments on index-linked gilts don’t rise further as a result of rampant inflation and that the chancellor holds his nerve. Because these are real-term reductions, a higher rate of inflation would of course allow the same cuts while spending more in non-adjusted cash terms. The government insists that departmental cash spending is fixed, but we shall see.
These cuts, while not huge, will be painful because soaring debt payments and protected areas mean that reductions to many departments will be much larger than the overall figure – and also because in many cases the wrong things will be cut. But a 3.7 per cent drop, while substantial, is less than the swingeing real terms cut imposed in just one year by Labour’s Denis Healey in the 1970s. Following the orders of the IMF, a bankrupt Britain slashed total spending by 3.9 per cent in real terms in 1977-78 (from £337.2bn to £323.9bn in 2009-10 prices) – so in just one year, public spending was reduced by more than Osborne is planning over four years.
There have been other instances of cuts in the past 40 years or so. Lord (Nigel) Lawson cut by 2.6 per cent in 1988-89, at the height of his own inflationary bubble; the reductions were largely painless as they were caused by a slump in unemployment benefits. He cut in more difficult circumstances by 1.4 per cent in 1985-86. Spending grew slightly in the following two years – but expenditure over the four-year period fell by 3.1 per cent. Spending only returned to the levels of 1984-85 in 1990-91 – and remained lower as a share of GDP. Kenneth Clarke cut spending by 2.2 per cent in 1996-97 –and then Gordon Brown stuck to his predecessor’s plans and went on to cut another 0.5 per cent or so in 1997-98, taking the two-year reduction to 2.7 per cent.
Osborne’s plans are far from perfect. He desperately needs a supply-side agenda to boost growth. But his real gamble is that he is spending as much as he thinks he will be able to get away with – and cutting as little as possible. The Labour party may not see it – but the IMF certainly does.
allister.heath@cityam.com
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