Guest Blogging

Over at LabourList.

Cameron versus the IMF

I’ve just been reading David Cameron’s speech of yesterday. It scares me.

In particular (my emphasis):

Now some people say: let’s get through the recession, let’s get through the election we can keep on spending more, keep on borrowing more, and deal with the debt crisis later.

Wrong – seriously wrong.

The alternative to dealing with the debt crisis now is mounting debt, higher interest rates and a weaker economy.

…

They’ve just announced a spending increase – not a cut, but an increase – of £20 billion for next year.
They’ve delayed the cuts until after the election.
Now I wonder why that could be?

…

We opposed the £12 billion Labour wasted on the VAT cut.
We were against the fiscal stimulus.
We said they should reduce their spending plans back in 2008.
And now we’re saying they should abandon their irresponsible plan to increase spending in 2010.

I take the opposing line. In the face of a severe financial crisis the government needs to make active use of fiscal policy to maintain demand and prevent the recession becoming worse. I think that the effectiveness monetary policy is constrained by the problems within the banks. The Tories disagree and instead believe that we should let the Bank of England get on with it and do its job.

It seems not only do I disagree, but so do the IMF, whom the Conservatives seem pretty keen on nowadays.

However, during recessions associated with financial crises, fiscal policy tends to have a more significant impact, which is consistent with other studies that find that fiscal policy is more effective when economic agents face tighter liquidity constraints. The lack of a statistically significant effect from monetary policy during financial crises could be a result of the stress experienced by the financial sector, which hampers the effectiveness of the interest-rate and bank-lending channels of the transmission mechanism of monetary policy.

In other words the IMF thinks monetary policy (letting the Bank of England do its job) is not enough.

We face a deflationary recession caused by a lack of effective demand in the economy, cutting off the fiscal taps now will only make it worse.

The Government can see this, the IMF can see this, why can’t the Tories?