Why the significance of yesterday’s IMF intervention shouldn’t be overstated

By Peter Hoskin
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Much
ado about the International Monetary Fund’s World Economic Outlook report,
which was released yesterday. It’s not so much the fact that they’ve downgraded
their growth forecasts for the UK, to 0.7 per cent for this year and to 1.5 per
cent for next – we’re used to that. It’s more what they say about deficit reduction.
“Greater near-term flexibility in the path of fiscal adjustment should be
considered,” reads the report, “in the light of lacklustre private demand.”

So
far as this recommendation is significant it’s because it adds to the forlorn
chorus encouraging George Osborne to consider a different approach. Not only do
we have Ed Balls and Vince
Cable, we now also have the International Monetary Fund. And it’s a body that
wears its historic importance heavily. No wonder the newspapers – and the Labour party – are getting excited.

But
the significance of the IMF’s intervention shouldn’t be overstated, and for
three main reasons. Here they are, briefly:

• An
  inconstant compass. Guess which organisation spoke of the “credibility” afforded by
  the UK’s spending cuts, last year? Guess who said, in 2011, that “strong fiscal
  consolidation … remains essential”? Or, in 2010, claimed that Mr Osborne’s
  plans were “appropriately ambitious”? Yep, don’t you just know it: the IMF.
  This isn’t to say that their views should be ignored, just because they may
  have changed. But we shouldn’t pretend that they are a firm compass, always
  pointing in the right direction.

• Advice that’s
  already being acted upon. Besides, it might be argued that, despite Mr Osborne’s continuing emphasis on the importance of deficit
  reduction, the Government is already weaving some of that IMF-backed “near-term
  flexibility” into its plans. Not only has the Chancellor stretched his fiscal
  rules to breaking point instead of implementing further spending cuts and tax
  rises, but his last two financial statements have included measures
  to boost capital spending. Indeed, one of the most important shifts in this
  Government’s thinking has come over capital spending. There’s a growing belief
  on Downing Street that they shouldn’t have emulated the pace of Alistair
  Darling’s proposed, original cuts.

• And what
  about the smaller numbers? A point I’ve made before, including in this
  recent post: focussing on the big forecasts from the big forecasting bodies
  can lead us to neglect the smaller numbers that often matter just as much. Parts
  of the UK have been in recession for decades, yet the fury and bluster seems to
  be held back for when bodies like the IMF change their predictions by a few
  fractions of a percentage point.

There
is one wider lesson for George Osborne in yesterday’s report, however: never
place too much stock in the judgements of external organisations, be they
monetary funds or credit-rating agencies. They can look favourably on politicians’
efforts sometimes – but, crucially, they can also change their minds.