Osborne to IMF: I Told You So
Third Year of Expansionary Fiscal Contraction

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Chancellor Zero is no more. Growth is back, even the neo-Keynesians at the FT and the wonks at the IMF can’t deny that the UK expanded faster than the rest of the G7 last year and will probably do the same this year. George Osborne is in Washington today to gloat that

“despite warnings from some that our determined pursuit of our economic plan made that impossible. All of this demonstrates that fiscal consolidation and economic recovery go together, and undermines the pessimistic prognosis that only further fiscal stimulus can drive sustainable growth. Indeed that is precisely the wrong prescription for our economies…”

Ed Balls got it wrong is the core message. Labour will point to per capita GDP which is still 10% lower than it was in 2007 – that will be a second term objective for the Chancellor. Balls will less convincingly say George has missed his deficit target, less convincing because Labour would have missed it by more and opposed almost every measure needed to reduce the deficit. The neo-Keynesian argument that higher unemployment would increase the welfare bill and thus the deficit has been proven to be wrong. Unemployment is down from what it was under Gordon Brown, with the warnings from the likes of David Blanchflower of 4 to 5 million unemployed having turned out to be political hyperbole that has fatally damaged his career as a sage. That “expansionary fiscal contraction” that left-wing wonks and economists said would never come is entering a third year…

Leading left-wing wonk and wannabe Labour MP Will Straw argued in 2011 that Britain’s economy faced the risk of a Japanese-style “lost decade” and that “expansionary fiscal contraction” was a “voodoo theory”, and even that there was no such thing as an expansionary fiscal contraction. In 2011 Guido argued the point at length with Will on the BBC’s Daily Politics:

Having failed at the time to get an on-air apology from Will for his role in Gordon Brown’s Treasury, three years later he must now accept that he was wrong about a lost decade and wrong that there was no such thing as an expansionary fiscal contraction. Over to you Will – as growth is expected to hit 3% you have a second chance to offer an apology…

Osborne’s “Clear Position” on the IMF

This £10 billion bailout for the IMF brings the total Osborne has pledged to £40 billion, or some £666 for each and every man, woman and child in the Britain. In October last year after British taxpayers sent £9 billion to the IMF – £9 billion that Osborne had to borrow, Osborne told the House of Commons categorically:

“Britain will not be putting money into the bail-out fund either directly or through the IMF…. The IMF exists to support countries, it does not exist to support currencies… The IMF contributing money to the eurozone bail-out fund, no; Britain contributing money to the eurozone bail-out fund, no. That is Britain’s clear position.” 

The Chancellor could not be any more clear, he gave his word, it was an unqualified promise. Which Osborne has now broken.

Ed Balls lines up with Obama saying…

“The IMF should not become the de factor central bank of the eurozone. That is the principled position Labour and the US government have taken and why we voted against increased funding last summer.”

Not a Single Billion More

George Osborne gave a cast iron promise last October:

“Britain will not be putting money into the bailout fund either directly or through the IMF… the IMF exists to support countries, it does not exist to support currencies. The IMF contributing money to the eurozone bailout fund, no; Britain contributing money to the eurozone bailout fund, no. That is Britain’s clear position.”

Ed Balls and Tory backbenchers are at one on this, it is for Germany through the ECB to support the €uro. The American and Chinese Treasury ministers agree, it is not the purpose of the IMF to bailout an ill-conceived currency union. Don’t forget your promise George*…

*Guido hasn’t forgotten his IMF promise.

Osborne Backtracks

With the Greek government splitting on the referendum promise last night, today’s G20 summit is going to be even messier with the prospect of a snap Greek election now not out of the question. Papandreou says the referendum is about how the bailout, and the conditions that come with it, could be fed to the Greeks.

What is clear is the European political elite wants more bailout cash…

Two weeks ago Osborne told the Commons:

“Britain chose not to join the euro and the British Prime Minister has fought hard to get Britain out of the bail-out fund to which the previous Government signed us up. I want to make it clear that whatever the Commission President says, British taxpayers will not be contributing to the eurozone’s bail-out of Greece—full stop.”

Yet overnight we learn that Britain is gearing up to give more money to the IMF in a futile effort to try to keep Greece in the Euro. Surely this is a change of tune from just last week when Osborne said:

“Britain will not be putting money into the bail out fund either directly or through the IMF… the IMF exists to support countries, it does not exist to support currencies. The IMF contributing money to the eurozone bail out fund, no; Britain contributing money to the eurozone bail out fund, no. That is Britain’s clear position.”

We’ll be sure to believe you next time you make Britain’s position clear, George.

Quote of the Day

George Osborne told MPs…

“Britain will not be putting money into the bail-out fund either directly or through the IMF…. The IMF exists to support countries, it does not exist to support currencies… The IMF contributing money to the eurozone bail-out fund, no; Britain contributing money to the eurozone bail-out fund, no. That is Britain’s clear position.”

IMF Wants More

Back in July the government won a vote to send £9 billion to the IMF by just 28 votes, the tightest margin yet for the Coalition government. Despite the best efforts of the whips some thirty-two Tory MPs rebelled against the government.

Osborne’s former bag carrier Matthew Hancock thinks this was a bad thing, others (including Ed Balls, Guido and John Redwood) think they voted in the national interest. We were told at the time that this was not like £9 billion transfer which we would never see again, it was a “contingent liability” and the IMF has never failed to repay such borrowings. The IMF has never faced a financial crisis on this scale before, the US is in no position to be the leading lender of last resort if the Euro shatters the IMF.

Christine Lagarde of the IMF is now briefing that the IMF needs more funds to deal with the worst case scenario.

Osborne and the Treasury spin that if Britain wants to sit at the top table the taxpayers have to cough up to the IMF. Isn’t it time to let other people sit at the top table. Brazil, China and India should get a better seat. The menu doesn’t look that appealing and is overpriced.

Osborne’s Bumpy Ride

Though both the IMF and the Treasury are quick to stress that deficit reduction is the right thing to do, it’s not going to be as pleasant as the Chancellor will have us believe. Ronald Reagan asked to be judged on whether you were richer at the end of his medicine or before, but George will probably want to avoid that particular campaign slogan, given the IMF warn that British households will apparently be £1,500 worse off each year of the slowing recovery.

It’s still steady as we go though, unless the UK experiences “a prolonged period of weak growth and high unemployment”, when an additional plan could be called for. Not the one Labour drone on about though, with a slow down in cuts, but Plan A+, with added tax-cuts to complement the state trimming…

Which isn’t the worst idea Guido has ever heard…



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Quote of the Day

Charles Clarke says Cameron is the most successful PM for over a century…

“Under Margaret Thatcher the Conservatives gained 99 seats. They lost 211 under John Major, gained one under William Hague, quickly and wisely got rid of Ian Duncan-Smith, gained 32 under Michael Howard and have so far gained 133 under David Cameron who, to the great surprise of many (including senior Conservatives), has turned out to be the most electorally successful Tory leader since 1900.”

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