IMF Review of the UK Economy

I’m sorry to keep banging on about this, but much of the deficit reduction pain would be mitigated if we were actually growing our economy. That would mean more taxes, less unemployment and less benefits. Although when it all goes wrong, we can expect our Chancellor to be surprisedly holding up his hands claiming all of this was unforeseeable.

Now all of this is very fraught. It’s a bubble that depends on confidence. So the journalists are telling us that as soon as the existence of a Plan B in admitted, then Plan A is dead. All of which means that we need to read between some especially wriggly lines when looking at reports.

The BBC has been airing a fascinating series by Adam Curtis – “All Watched Over by Machines of Loving Grace“. Which reminded me that the chief  function of the IMF seems to be to safeguard the investment of international bondholders – often at the expense of the economies of the individual nations.

And although the film highlights this in the context of the Far East crashes – particularly the Indonesian riots of 1997 – it’s easy to see the patterns repeated recently in Greece, Portugal and Eire. An initial “bail out” results in a capital exodus, and more assistance is then required. The taxpayers then have to pick up the tab.

A quick aside:

• There’s never actually been much risk of nations defaulting – it’s just another excuse to charge higher interest.
• Maybe the bondholders should carry some of the risk of the free markets they push us all into.
• Ironically, one of the benefits of debt reduction may be that we get out from under this tyranny – but I bet we still continue to borrow money
• According to Peston (from memory), our average debt repayment is 13 years. So there is no real reason to rush the cuts. 

But I digress … The IMF report is apparently supportive of our government’s deficit reduction plan. But once again, we’ve a downgrade of a growth forecast – down to 1.5% from a hardly spectacular 1.7%. But it’ll be alright “in the Medium Term”. Jam tomorrow, then.

Similarly, we’ve got inflation at 4%. And the IMF think this will return to 2% by the end of the year ( presumably as the VAT increase drops out). However, as we’re getting almost 20% increases in Gas prices, and world food prices aren’t reducing I suspect that this might be optimistic.

The IMF is keen not to rock the boat, but as the BBC report points out, the previous assessment of our economy as “on the mend” has been revised to “repair … is underway”.

Actually I’m not on my own here.  A whole bunch of economists have written an open letter to the Guardian suggesting that these policies might need a bit of tweaking. And Stephanie Flanders seems to be keeping real on her ‘blog.

Meanwhile, lots of the cuts have still to be fully implemented, and we’re also hearing that manufacturing output is dropping and confidence in the economy is down to 10%. Retail spending is falling. All suggesting that this experiment in reviving Thatchernomics is whirling us further down the plughole (just as a reminder – it didn’t work the first time).

UK Growth (again)

Again, this is the part of the equation our government ignores.

Mervyn King – the Governor of the Bank of England – has downgraded the prospect of 2011 growth to 1.75%. Performance for this year (once adjusting for December snow) is apparently about flat (i.e. – 0%) over the last two quarters.

Meanwhile, growth in the Eurozone, where cuts are generally not seen as the only solution, is running at 0.8% for the quarter. Over the same period, Germany managed 0.8%. Even Greece is now showing growth. There’s a more informed commentary on Stephanie Flanders’ blog)

Why does this matter ? Well, the economics of governing the country are different from the economics of the country itself, but the two are very closely linked.

So if the nation doesn’t grow, then the government’s income (from tax revenues) is reduced. And if people spend less of their income (because they’re worried about their jobs) then the government’s income (in  terms of VAT revenue) is reduced.

This is at the heart of Keynesian economics (which I learned to A-level). Apparently Vince Cable was brought up on these principles as well.

When a significant proportion of the population are dependent on public sector activity, then they suffer when the cuts bite. And the government loses income. So the deficit increases.

And worse still is to privatise activities which then get relocated to another country. In that case, you’re losing tax revenue, reducing growth and throwing more people on benefits.

There are a lot of people looking for work at the moment – and there will be many more over the next few months. I hear nothing about reskilling them for the future. The narrow view of how an economy works – by using Thatcher’s purse as a metaphor – is ludicrous. That resulted in the loss of our manufacturing capacity back in the 80’s.

However, as our economy is destroyed, the government will carry on saying that – of course – it would have been worse if another path had been followed. And because we can’t go back in time and try anything else, then he can’t actually be proved wrong.

The deficit does need resolving, but it needs to be resolved at a far more considered pace, with growth initiatives in place, properly thought through and promoted.

This is part of my little project to try an keep a track on reports of UK Growth – and comments upon it. You can use the tag search to find all the related articles.

Economic growth (again …)

Our Chancellor now say that there will be “financial turmoil” if he has to ease off on tax rises and spending cuts.

Sorry, Ozzy, that’s a cop-out. If you’re saying you can’t backtrack because it’s too complicated, then you’re just incompetent.

Interestingly, the fact that this is being addressed at all suggests that he’s maybe starting to worry that his plans will go horribly, horribly wrong. The USA, for example, is focussing on growth (apparently successfully) – something which our government is just hoping might come good …

The suspicion of desperation is fuelled by his plan to persuade companies sitting on cash reserves to “start spending that money”.  Good luck with that. If I was running a business, I’d be hanging on to every penny at the moment – given that the banks aren’t likely to lend it out if I need some (I see you’re not expecting the banks to spend the cash any more – even though we own them).  I’d actually be looking to reduce my working capital at a time when demand is falling.