Welfare Spending Cuts
– IMF data undermines the case
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| Christine Lagarde Director of IMF |
This month the IMF has published its latest report into the world economy - the IMF World Economic Outlook .
News stories talked of the report’s lowering of UK growth predictions, but much
more importantly the IMF report contains a finding that undermines one of the
central assumptions of UK’s economic policy. It provides substantial evidence
that Government spending cuts do much more damage to the economy than had
previously been thought
.
When the Government cuts its spending everyone agrees that
the UK’s economic output (GDP) will be reduced – the question is by how much. The
Government has underlying its policy and predictions the assumption that for
every £10 of spending cuts only £5 will be lost to GDP. What the IMF report
says is that for every £10 of spending cuts somewhere between £9 and £17 of
economic output is be lost. In the jargon the fiscal multiplier is not 0.5 as
previously thought but varies between 0.9 and 1.7.
The implications for economic policy are huge. Many
counties, the UK included, are reducing their levels of borrowing by rapidly cutting
government expenditure. Slow economic growth reduces government income and
reduces the government’s ability to service its debts. So borrowing less can make
a nation worse off if it hurts economic growth too much. If the effect of
spending cuts is 2 to 3 times more than anticipated then policy needs revised -
and quickly.
As can be expected a number of people have challenged the
data, and it will take time to reach a new broadly accepted position on the
effects of cuts. What is fascinating is the extraordinarily poor evidence base
for the previous consensus and the numbers that underlie the Government’s
current forecasting. Moreover the Government numbers for economic multipliers
are based on the data of the past 30 years unaltered since the economic crisis.
It is not surprising that the current climate has changed the effects of
government spending dramatically. What is surprising is that many economists
and politicians are unwilling to even contemplate the possibility that the
facts are changing – even in the face of the new IMF data.
The driving force behind huge swathes of the
austerity policies which are causing pain to the poorest all round the
world appears not to be strong evidence
but worryingly inflexible ideology. As someone who in my previous career
designed new vaccines it shocks me that the level of evidence necessary to test
a new medicine on ten volunteers appears to be several orders of magnitude
greater than the level of evidence required to impose a potentially catastrophic
economic policy on billions.
Welfare spending makes
economic sense.
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| Economic case for further £10Bn of Welfare Cuts undermined |
The economic multiplier story has a further twist as
everyone acknowledges that different types of government spending have
different economic effects. If the money government spends goes to a person or
company that in turn spends the cash quickly, then this will have a good
economic effect (or high fiscal multiplier). If the money is put into savings or
spent abroad, this is economically inefficient government spending (with a low
fiscal multiplier).
Poor people have no choice but to spend their money quickly.
Poor people have no choice but to spend their money in the UK. For this and a
number of other reasons welfare is an economically efficient way to spend
government money. Moody’s, a stalwart of the US financial establishment as well
as the world’s largest credit ratings agency, in a US study estimated that for
each $1 spend on welfare the economy $1.73 of economic growth was generated.
The study was performed in 2008, pre-crisis, and all indications are that performed
today, the benefit of increasing welfare spend would be considerably more. They
also noted that the methods of stimulating the economy preferred by the UK
Government – tax breaks to business and people higher up the income spectrum - were
much less effective at generating growth, with $1 of government money adding
only $0.34 to $0.50 to the economy, largely because the money is not spent by
the recipients quickly.
The Effects of
Further Welfare Cuts.
You can forget the maths and the jargon if you want but the
implications of the data should be remembered. The Churches have argued that
hurting the poorest most in public spending changes is morally wrong as well as
being socially divisive. The IMF and others have now produced strong evidence
that hurting the poorest is also economically damaging.
It is now difficult to find any evidence for the
view that the £10Bn of further welfare cuts as announced last week would be either
morally, socially or economically wise. Let us hope the evidence reaches the
policymakers before further harm is done to the most vulnerable communities in
this country.
