Wednesday, 29 May 2013

Recent IMF Criticism of Coalition Unlikely to Lead to Policy Shift

Liam Clegg reflects on the fallout from the Fund's recent trip to the UK, arguing that although the IMF's criticism of the coalition is unlikely to lead to a policy shift, it is still important. 

In fact, the IMF looks set to have a significant impact on UK politics in the lead up to the next general election, becoming a key ‘reputational intermediary’ in the battle for economic credibility between the Coalition government and Labour opposition. 

"Once a year, a Mission Team made up of a small number of IMF staff travels to each member state to conduct an audit of its current economic policies and prospects. After discussions with country authorities, the Team produces what is known as an ‘Article IV Report’. In general, these Article IVs tend to remain very low-profile affairs, read by few people outside of the IMF Boardroom. 

However, in times of crisis, Article IVs can become headline news. Typically, in times of economic malaise one of two factors will propel an Article IV into the realms of newsworthiness: either a government will draw upon a positive Report as an authoritative ‘stamp of approval’ for their policy agenda, or critics of a government will draw upon a negative Report as authoritative evidence of the failure of the government’s programme. We can see that both of these dynamics have been in operation in the UK in recent years.

Back in June 2011, UK Chancellor of the Exchequer George Osborne sought to direct the public gaze towards the recently completed Article IV – particularly the opening sentence of the Mission Team’s Concluding Statement, which read: ‘Aided by the implementation of a wide-ranging policy program, the post-crisis repair of the UK economy is underway’. Indeed, through subsequent Budget and Autumn Statements, Chancellor Osborne sought to further highlight this boost to his, and the Coalition government’s, credibility as competent economic managers.

Fast-forward to the recently completed 2013 Article IV, and the story appears to be very different. Last month, before the Team had even arrived, the characterisation in an interview with Sky News from the IMF Chief Economist of the Chancellor’s fiscal policy as being akin to ‘playing with fire’ attracted widespread media comment. And this time, the Team’s Concluding Statement opened with the suggestion that ‘the UK could boost growth by bringing forward… spending on infrastructure and job skills’. Ed Balls, Labour’s Shadow Chancellor, has been quick to capitalise on the IMF’s judgement. On the day that the Mission Team’s Statement was released, Balls boldly proclaimed that the IMF ‘backs the warnings we have made for three years that the government’s plans are a drag on growth and risk doing long term damage’. While the IMF intervention will be a source of irritation at Number 11 Downing Street, there are three reasons why it is highly unlikely that it will ferment any notable policy shift from the government.

First, the Coalition government’s claims to being credible economic managers rest heavily on making a sizable dent in the deficit. Rapid deficit reduction was the core yardstick of success laid out by the Chancellor in his Emergency Budget Statement of 2010, and the next election will in significant part be fought on this ticket. As the action recommended by the IMF would entail a short-term increase in the deficit (in the hope of attaining an improved growth trajectory over the medium- to long-term), it does not sit well with this core aim. 

Second, the IMF itself suffers from something of a ‘credibility gap’ in relation to its macroeconomic policy advice. Critical scholars have long complained of the sub-optimal outcomes associated with Fund-supported programmes, and its own Independent Evaluation Office queried the clarity and effectiveness of its guidance in a recent report. Finally – and a closely related point – there remains widespread disagreement over how governments should navigate the post-Global Financial Crisis landscape. By calling into question what had rapidly become the ‘conventional wisdom’ on the need to rapidly reduce government spending to try and keep government debt-to-GDP ratios below the 90 percent mark, the recent Reinhart-Rogoff controversy illustrates just how much policy-makers are in the dark over the ‘correct’ course of action. In such a context of extreme uncertainty, a significant policy shift is highly improbable.

This 2013 Article IV, then, probably won’t lead the Chancellor to make even minor alterations to his fiscal programme. However, if – as appears increasingly likely – the IMF becomes a key ‘reputational intermediary’ in the battle for economic credibility between the Coalition government and Labour opposition come May 2015 (or perhaps earlier), the organisation will have a significant impact on UK politics. This time next year, with the release of the 2014 Article IV, the picture will become a lot clearer". 

Issues surrounding the changing role of the IMF are explored in Liam’s Third Year module ‘Governing the Global Economy’.

Will Vittery (PhD Candidate, Department of Politics) and Liam will in June present a paper (‘Generating Credibility in a Time of Crisis: Chancellors of the Exchequer and the Reconstruction of Economic Competence, 2007-2012’) at the British International Studies Association Annual Conference, Birmingham, exploring issues touched upon in this blog.

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