Growth and the IMF: Has the cat got the coalition’s tongue?

This has been another bad news week for those worried about the state of the economy.

Industrial production has been falling, according to the ONS. And the IMF, who previously thought that the Government’s cuts programme had taken about 2.5% off GDP over its first two years, issued new analysis showing that the impact of cuts may in fact have been substantially bigger than first thought.

Perfect timing then for Tuesday night’s SMF debate on growth and the economy at the Conservative Party conference fringe in Birmingham, featuring Chief Secretary to the Treasury Danny Alexander, Cabinet Office minister Oliver Letwin – both members of the Coalition’s powerful ‘sextet’ – and General Secretary designate of the TUC, Frances O’Grady. Some of the answers given by the ministers were particularly revealing. You can listen to the full podcast on the right of this page.

First I asked the Chief Secretary whether he’d have implemented the June 2010 consolidation plan if he’d known what state the UK economy would be in two years down the line.

Ian Mulheirn: In June 2010, when the [fiscal consolidation] plan was set, the OBR was expecting growth this year to be 2.9%, and now the IMF thinks it will be -0.4%. […] But if the OBR had said [in June 2010] “there will be a double-dip recession if you do this”, would you have said; “we’ll do it anyway because it’s the right thing to do”?

Danny Alexander: Well, you can ask as many counterfactuals as you like, I’ll talk about the decisions we made and why we made them. I think that is the right way, in fact, the only way, that I’m going to answer those questions.

Perhaps this is a case of ‘politician in question-dodging shock!’ but it’s intriguing that the Chief Secretary would not say that he would have signed up to the same plan if the OBR forecast had been accurate.

Oliver Letwin had his own take on that question:

Oliver Letwin: I remember I was an outstandingly bad student of Biology at what was then called O Level, and I had a teacher who recommended to me that I should do two things. First of all that if I was stuck for an answer I should draw cats on the exam on the ground that the examiner might be a cat lover and that would be better than trying to answer the question. […]

But the other piece of advice which he gave me […] is that you should never accept the implication of a question. […] And the question you were asking was completely ludicrous and stupid, and therefore an impossible question to answer, and Danny was absolutely right not to answer it, because you asked a question which assumed what is false, which is that it is the fact that the course we set was in any way responsible for the fact that we had a double dip recession. It is not so.

This seems like a remarkable claim to make when everyone, including the OBR, agrees that the cuts have had a significant impact on growth. But all the more tricky to defend on the day when the IMF issued its mea culpa.

But just as important was Oliver Letwin’s insistence that there was, and remains, no alternative to the current cuts plan because of the risk that more discretionary borrowing would lead to rising Gilt yields as investors lose faith in the Government’s grip on the public finances. This was a theme the Prime Minister echoed once more in his speech yesterday. Yet here again, the IMF (and many others) seems to disagree, as the chart below, taken from July’s Article IV consultation, shows. I put this to the minister.

Ian Mulheirn: The IMF’s last offering a few months back tried to do some analysis of countries which had their own exchange rate, their own monetary policy and those that didn’t, and they found that there was no relationship between a government’s cost of borrowing and its debt levels if they have their own, independent monetary policy. So, in a sense, is the panic really justified? It doesn’t seem like they are saying that there is any evidence that interest rates would rise if you were to change your plan.

Oliver Letwin: Well, the first thing I’d say is that I’m extremely glad that it’s George and not you who is Chancellor of the Exchequer because if you believe that thesis, you might try to find out whether this speculation is correct, and I don’t want to be part of a country in which that experiment is conducted. I don’t know and I can’t prove the counterfactual – you never can, but I wouldn’t want to take the risk. I do know that when the financial markets of the world lose confidence this has a very profound effect […]

We’ve all learnt much over the past two years as the effects of policy actions have become clearer. But the Coalition’s arguments are still very similar to the ones made back in June 2010. In answering my questions on Tuesday, maybe our ministers would have been better off drawing cats on a piece of paper.


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