It is nearly 80 years since the conference that led to the establishment of the International Monetary Fund (and World Bank) took place in the New Hampshire resort of Bretton Woods. I won’t say much more about the anniversary now, with three months to go, in case there is more to be done nearer the time.
Since 1944, or more accurately since 1945, when the IMF began operations, the UK has had an up and down relationship with it. The big one was the 1976 IMF rescue of the UK, a national humiliation. It was, however, preceded by a long period of IMF assistance and lending to this country, notably during and after the Suez crisis in 1956.
It may be that institutional history plays a part but, while some governments have tried to channel and embrace the IMF — for years its annual assessment of the UK economy was the subject of a celebratory joint press conference — others have baulked at what they see as its excessively downbeat attitude towards this country.
It is not always so downbeat. In October 2022, during the most inept period of economic management in UK history, it predicted 0.3 per cent growth for 2023. The outturn, 0.1 per cent, was even weaker. It was too gloomy then for America, France and Italy.
Even so, were it not for Germany’s woes, which appear to be easing, the UK would be the slowest-growing G7 economy this year, according to the IMF’s just-published World Economic Outlook. Its forecast of 0.5 per cent UK growth beats Germany’s 0.2 per cent but is outpaced by France, Italy, Japan, Canada, and by a very large amount, America, predicted to grow by 2.7 per cent. Under-performance like this is not what a government wants to hear in an election year.
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It is on this, policy in election years, that the IMF is particularly interesting. In its latest Fiscal Monitor, published a few days ago, it warned that the dangers of “fiscal slippages”, policies that result in more entrenched problems of high government debt, were particularly acute in election years.
You might wonder whether they just mean us. After all, the government has decided that the best way to lure voters is by offering tax cuts now — in lower national insurance, though stamp duty and inheritance tax are also being mooted — with the promise of more later.
But no, this is a more general warning. In what it calls the “Great Election Year” 88 economies or economic areas will hold elections this year, representing more than half the world’s population. India’s election, of course, bumps up that figure. When elections loom, politicians like giveaways, either tax cuts or extra spending.
“Empirical evidence shows that fiscal policy tends to be looser, and slippages larger, during election years,” the IMF says, and it is hard to disagree. Such slippages, it adds, are the opposite of what is needed because “fiscal consolidation is needed in most countries to strengthen debt sustainability and financial stability”.
They do not, as I say, just mean us, but we are an interesting case study. Jeremy Hunt would say that, in cutting national insurance twice so far and eyeing up further reductions in a pre-election autumn statement, he is merely paring back some of the increase in the tax burden needed to fix the public finances after the pandemic, while staying within his fiscal rules.
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It is hard to imagine though that in the absence of the election, he would be in such a rush to cut taxes, even though he believes it is necessary to improve the economy’s performance. Official figures released on Tuesday show the extent of the fiscal challenge.
Public borrowing in the 2023-24 fiscal year, £120.7 billion, or a chunky 4.4 per cent of gross domestic product, was £6.6 billion higher than the Office for Budget Responsibility’s latest forecast. Public sector net debt, at £2.69 trillion, was 98.3 per cent of GDP at the end of last month. These do not look like a green light for tax cuts.
Whatever happens over the next few months this parliament will break records for the rise in government debt, as well as for the weakness of growth, particularly on a per capita basis. The normal process of post-election fiscal consolidation after December 2019 was broken by the pandemic and, to a lesser extent, the impact of Brexit. The debt in December 2019 was £1.84 trillion, so it is up more than £850 billion since then, or from 84.8 to 98.3 per cent of GDP. The rise during this parliament should be less than £1 trillion, but not by much. These are high numbers.
Nor is the debt likely to stop rising. Even in the absence of renewed shocks, which may be a bold assumption, and assuming that tight spending plans are achieved, the Office for Budget Responsibility expects another £400 billion or so of debt during the next parliament.
The target measure used by the chancellor, debt excluding the Bank of England, is predicted to be 92.9 per cent of GDP by 2028-29, higher than the present figure of 89.4 per cent. The “room” for tax cuts is provided by the fact that it falls slightly in the fifth year of the forecast compared with the fourth. It remains to be seen whether any room persists in the autumn. The latest figures suggest it could be close, but the chancellor has been quite adept at finding money down the back of the Treasury sofa.
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You may ask whether this matters. Though we have had a very recent example of a government punished by the markets, so far investors have been prepared to take on ever-increasing amounts of government debt. But the price of this debt, literally, could be economically limiting higher long-term interest rates. And, unlike during the pandemic, central banks will no longer be around to mop up that debt with quantitative easing. The Bank is in the process of unwinding the purchases of government debt it undertook then. Elections and sound public finances do not mix, posing problems for the future.
