Duncan’s Economic Blog

Cameron versus the IMF

Posted in Uncategorized by duncanseconomicblog on April 27, 2009

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?

6 Responses

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  1. Tom Freeman said, on April 27, 2009 at 11:07 am

    The other thing that puzzles me about the Tory position (apart from its wrongness) is that they’re in favour of letting the automatic stabilisers operate. These will create much more debt over the next year or so than temporary stimuli such as the VAT cut. And while growth will eventually, slowly, reverse the cyclical deficit that arises from the stabilisers, the portion of the deficit due to the VAT cut will disappear when it expires at the end of the year.

    So the Tories are in favour of an unknowably large increase in public debt that will take an unknowably long time to drop out of the deficit, but are against a smaller increase in debt that’s based on a well-defined short-term bump in the deficit.

    • duncanseconomicblog said, on April 27, 2009 at 11:12 am

      You’re completely right. It’s just a hodge podge of half formed ideas with little logic behind them.

  2. VinoS said, on April 27, 2009 at 4:17 pm

    I am not sure how much of this is rhetoric and how much David Cameron actually believes. If he does, then we are in for a bumpy ride after 2010 if he gets into power. The public services and benefits will have to be cut back massively to reduce the deficit rapidly. Also, of course, automatic stabilisers mean the deficit is bound to rise in a recession. A government would have to cut social security benefits dramatically in order to avoid this. That is hardly a good thing for the 2m+ unemployed who already have to make do with only £60/wk.

  3. pablopatito said, on April 28, 2009 at 9:30 am

    Cameron said he was against ‘the fiscal stimulus’ not ‘fiscal stimulus’. I take that to mean he would have been in favour of a different and/or smaller fiscal stimulus, don’t you?

    • duncanseconomicblog said, on April 28, 2009 at 9:35 am

      Actually I like he is against a stimulus.

      “They’ve just announced a spending increase – not a cut, but an increase – of £20 billion for next year.”

      “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.”

      Sounds pretty anti stimulus to me.

    • duncanseconomicblog said, on April 28, 2009 at 9:39 am

      Actually thie ConHome post ‘Cameron rules out fiscal stimulus’ clears it up for me.


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