“Activity over the past few years has disappointed more in economies with more aggressive fiscal consolidation plans, suggesting that fiscal multipliers used in making growth forecasts have been systematically too low.
“This relationship holds for different components of GDP, the unemployment rate, and forecasts made by different institutions.”
- So said the IMF last night, in a rather dry, but timely confession their forecasts of both the cost of too fast cuts to government spending had been underestimated, and the benefits to short term stimulus had been also been underestimated.
But their factor of underestimation is quite significant, and will give an enormous boost to the credibility of Ed Balls’s plans to get UK growth, and with it our deficit reduction, back on track.
The IMF states their underestimate of the effect of a stimulus on output could have been too small by a factor of between two and three. That is an enormous reassessment. Applying those to Ed Balls’s five-point plan, his stimulus would boost output enough to reduce borrowing in the year of the stimulus!
With the IMF also announcing last night they are expecting the UK economy to shrink by 0.4 % this year, Ed Balls has won a significant ally in the IMF’s reassessment. He’s rightly won plaudits for his economic analysis in his Bloomberg speech two years ago that the economy would suffer badly from the coalition’s speedy cuts.
But this is much more significant. The IMF’s reassessment means Ed Balls had the right policies a year ago. Being right on policy wins elections.
• IMF: Cuts hurt growth more than expected – Oct 9 2012