IMF Is Sugarcoating Same U.K. Medicine

Marc Champion writes editorials on international affairs. He was previously Istanbul bureau chief for the Wall Street Journal. He was also an editor at the Financial Times, the editor-in-chief of the Moscow Times and a correspondent for the Independent in Washington, the Balkans and Moscow. He is based in London.
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The International Monetary Fund has decided to stop beating up on the U.K. Or that's how it looked when the fund's first deputy managing director, David Lipton, launched the latest Article IVconsultation on the U.K.

Some slightly better-than-expected recent economic news probably contributed to the change in tone, and no doubt there was some arm-twisting from the U.K. government. But it may also reflect a simple recognition of the art of the possible.

Since the fund's chief economist, Olivier Blanchard, accused the U.K. government a month ago of "playing with fire" by sticking to austerity, it has been clear that Chancellor of the Exchequer George Osborne won't admit he was wrong on his signature policy, and has no intention of changing it.

"Our plan is working," Osborne told business leaders last week. "Now is not the time to lose our nerve."

On the other hand, the last two budget statements showed that Osborne is willing to talk at the margins about infrastructure spending, cutting corporation-tax rates and other measures, so long as the changes are fiscally neutral. The IMF's point, which is correct, is that fiscally neutral measures are nowhere near big enough to boost growth, which the U.K. still badly needs.

Read this way, the IMF's position hasn't changed much. Lipton laid out what the IMF believes Osborne, as the minister responsible for the Treasury, isn't doing enough of, and warned that failure to act would lead to continued anaemic growth and permanently lost productive capacity.

Item No. 1 was infrastructure spending. The government has a project list worth about 300 billion pounds ($453 billion) -- it needs to bring forward as much of that planned spending as possible to offset budget cuts (10 billion pounds this year), and do it fast, Lipton said. That should be fiscally neutral over the medium term because infrastructure spending would be lower than planned later on. For now, though, it would be stimulus.

Second, do what it takes to return Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc to the private sector -- recapitalizing them with taxpayer money, if necessary. This would help fix the U.K.'s broken transmission mechanism between monetary policy and the real economy.

Third, lower the tax burden on corporations and investment, paying for the lost revenue with a higher take from property and sales taxes. At the moment , the headline corporation-tax rate is 23 percent, falling to 20 percent in 2015.

And finally, continue with active monetary policies and signal to markets and consumers that interest rates are going to stay low for the foreseeable future.

Lipton also tried to pre-empt some government objections. For example, the government has said that not enough of the 300 billion pounds' worth of infrastructure projects is shovel-ready and that slowing deficit reduction by adding stimulus would wreck market trust in the U.K. Remove the barriers blocking the projects, Lipton said. As for trust, if the market sees money spent wisely on supply-side improvements that will deliver productivity, trust will increase.

This is all, surely, correct. If Prime Minister David Cameron and the ruling Conservative Party spent more of their time and political capital on getting investment flowing, instead of bickering about a 2017 referendum on the U.K.'s membership in the European Union, they might even succeed.

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