The proclamations of economists and economic bodies shouldn’t be taken as the
be-all-and-end-all of fiscal policy – for every one claiming that a decision is right, you can find another insisting that it is wrong. But the coalition will still be pleased by the
influential International Monetary Fund’s latest report, here. It begins:
"The UK economy is on the mend. Economic recovery is underway, unemployment has stabilized, and financial sector health has improved. The government’s strong and credible
multi-year fiscal deficit reduction plan is essential to ensure debt sustainability. The plan greatly reduces the risk of a costly loss of confidence in public finances and supports a balanced
recovery. Fiscal tightening will dampen short-term growth but not stop it as other sectors of the economy emerge as drivers of recovery, supported by continued monetary stimulus."
And continues, further down:
"The government’s strong deficit reduction plan will ensure fiscal sustainability. The fiscal mandate of balancing the cyclically-adjusted current budget by 2015/16 is
appropriately ambitious. The plan’s credibility has been bolstered by a frontloaded path that achieves the mandate one year early and by a suitable mix of concrete spending and revenue
measures. The consolidation plan and implementation of early measures to tackle the deficit—one of the highest in the world in 2010—greatly reduces the risk of a costly loss of
confidence in fiscal sustainability and will help rebalance the economy. These benefits outweigh the expected costs in terms of adverse effects on near-term growth. Indeed, market reaction to the
adjustment plan has been positive."
There’s even a dollop of praise for the Office for Budget Responsibilty:
"The establishment of a new independent Office for Budget Responsibility (OBR) is a welcome step toward strengthening the budget process. Addressing deficiencies in the previous fiscal
framework, the tasks envisaged for the new independent office—including to provide the macroeconomic and fiscal forecasts for the budget and to assess fiscal sustainability and compliance
with the fiscal mandate—are apt."
Although there are some notes of caution:
"Nonetheless, important challenges remain. The ongoing adjustment of bank balance sheets needs to continue, as public support schemes taper off and regulatory requirements tighten.
Meanwhile, uncertainty about the sustainability of bank profits and the quality of their assets, especially some banks’ exposure to commercial real estate, remains significant. Faced with
such uncertainty, banks have stayed cautious about extending new credit. Tight credit supply, in turn, could curb the pace of recovery once credit demand, which is currently weak, picks
You can expect the coalition to make a lot of this report. But my question is: what happens if Gordon Brown takes over the IMF, as some speculate he might?