IMF got it wrong on austerity says watchdog

Fund was premature in pushing for budget cuts in rich countries in 2010

The International Monetary Fund gave bad advice when it urged developed countries to impose fiscal austerity four years ago, the Fund’s own watchdog has concluded

“IMF advocacy of fiscal consolidation proved to be premature for major advanced economies, as growth projections turned out to be optimistic” the IMF’s Independent Evaluation Office (IEO) said in a report released today. The IEO added that excessive austerity has held back the global recovery.

The IMF enthusiastically backed the Coalition’s emergency budget in 2010, but reversed its position last year, urging the Chancellor to borrow more in the face of the weakness of the economy.

The IMF has also now urged the German government to enact a fiscal stimulus in order to prop up the tottering eurozone economy. The Fund has also been critical of deep US government spending cuts in recent years.

The IEO said that four years ago the IMF failed to understand that the so-called “fiscal multipliers” of government spending were higher in the wake of a global financial crisis, meaning that the impact of spending cuts and tax rises were more severe than in normal circumstances.

It also said that the Fund failed to appreciate the economic drag imposed by deleveraging households and companies in the wake of debt bubbles bursting.

The managing director of the IMF, Christine Lagarde, rejected the thrust of the criticism.

“Considering the information and growth forecasts available in 2010, I strongly believe that advising economies with rapidly rising debt burdens to move toward measured consolidation was the right call to make” she said in a statement. “This assessment is benefiting from hindsight”.

Ms Lagarde added that when it became clear the global growth outlook had deteriorated the IMF quickly changed its advice on the pace of fiscal consolidation.