In his Budget speech on 23 March 2011, George Osborne asserted that “our country’s fiscal plans have been strongly endorsed by the IMF”. In that speech – where he also claimed “we’re all in this together” – our part-time, downgraded Chancellor noted that the OBR forecast was for growth of 2.5 per cent in 2012 and 2.9 per cent in 2013 and 2014.
The actual outcome for 2012 was a pathetic 0.3 per cent. There were three negative quarters of growth and one positive one of 0.9 per cent, driven by the Olympics. There has been zero growth over the last six months. In its April 2013 World Economic Outlook, the IMF forecast growth in the UK of 0.7 per cent in 2013 and 1.5 per cent in 2014. In its latest Inflation Report, the ever overly optimistic Bank of England last week revised up its 2013 growth forecasts to an unlikely 1.2 per cent per cent.
On Wednesday, the IMF finally turned from apparent ardent supporter to pesky critic when it argued that the UK is “still a long way from a strong and sustainable recovery”, contradicting Sir Mervyn King’s claim that “a recovery is in sight”. Most of the business leaders and economists that Slasher claimed supported his policies in 2010 have also bailed out.
It has rapidly become clear that the IMF has moved to the Labour Party’s view that cuts to public spending were too deep and too fast, especially to capital spending, and backs up their calls for a Plan B U-turn to boost growth and jobs.
Build, Mr Osborne
The team leader, David Lipton, argued that Britain should bring forward investment in infrastructure and defer some spending cuts to get the flat-lining economy moving again. At the press conference (that George Osborne skipped out of presumably because he couldn’t face hearing critical comments), Lipton made clear that the £10bn fiscal consolidation the Coalition is due to make over 2013-14 should be “offset” by a package of infrastructure spending and tax cuts. This would mean there would be no net structural deficit reduction in the present financial year. Oops!
That is what no growth and a deficit reduction plan that hasn’t reduced the deficit for two years will do. It didn’t help that on the morning of the IMF’s publication of its Article IV Consultation Concluding Statement there were a host of data releases all of which brought varying degrees of bad economic news. The ONS showed that retail sales volumes fell by 1.3 per cent between March and April 2013, with the largest downward pressure from the food sector. It also reported that public sector net borrowing, excluding the impact of the Royal Mail pension fund transfer and the Asset Purchase Facility transfer, was £10.2bn in April 2013. This is a rise of £1.3bn compared with April 2012.
Forecasts from the Office for Budget Responsibility published at the time of the Budget show that between 2011-12 and 2015-16, the Government is expected to borrow £245bn more than it planned at the time of the spending review in autumn 2010. RBS economist Ross Walker said: “The UK’s deficit reduction process has stalled once the various one-off transfers and favourable accounting adjustments are stripped out.”
On the same day, the CBI Industrial Trends Survey showed that manufacturing output was broadly flat over the three months to May, again disappointing expectations for a more pronounced recovery. Capital Economics has pointed out that while the total orders balance picked up from minus 25 in April to minus 20 in May, at this level the balance is still consistent on the basis of past form with manufacturing output falling at an annual rate of about 1 per cent.
The Bank of England’s Agents monthly report was also rather downbeat. Not much healing or signs of recovery here. This, added to fall in CPI inflation to 2.4 per cent, suggests there is more disinflationary pressure in the UK economy than previously thought. That makes the Monetary Policy Committee’s 6-3 vote against extending quantitative easing look even more surprising.
The IMF hardly pulled its punches, arguing in a ringing indictment of Coalition policy that the prospect remains for weak, below potential, growth that could permanently damage the British economy. The most telling paragraph in the report was the following: “The UK is, however, still a long way from a strong and sustainable recovery. Notwithstanding the recent uptick in activity, per capita income remains 6 percent below its pre-crisis peak, making this the weakest recovery in recent history.
“Of particular concern is that capital investment (as a share of GDP) is at a postwar low, and that youth unemployment is high. The prospect remains for weak growth. Given ongoing domestic deleveraging pressures and weak external demand, activity is expected to pick up only gradually.
“Similar to the view of the Office for Budget Responsibility, the most likely scenario is a prolonged period in which output is below potential. Risks remain tilted to the downside. The key risk is that persistent slow growth could permanently damage medium-term growth prospects.”
The IMF was also critical of the Help to Buy scheme that could be used by rich people to purchase their seventh house, because of the possibility that would start another housing bubble. It pointed out that the Chancellor’s scheme could ultimately make it even harder for first-time buyers to get on the housing ladder.
The IMF further argued that reduced concentration in the banking sector might better serve firms and households “especially given few alternative sources of funds for start-ups and smaller enterprises’”
Vindicated Shadow Chancellor Ed Balls, who has called this exactly right, responded: “Behind the diplomatic language, this is the call for action on jobs and growth that the IMF has been threatening to deliver for many months and a stark warning of the consequences if the chancellor refuses to listen.
“The IMF is clear that we are a long way from the strong and sustained recovery we need, and backs the warnings we have made for three years that the Government’s plans risk doing long-term damage.”
No wonder Osborne ran away to hide.