Not all that long ago the International Monetary Fund was one of the biggest critics of UK economic policy. Back in Gordon Brown’s day the Fund constantly warned him about overspending. George Osborne was told that his policies amounted to “playing with fire”.
But, on the face of it, those days are long gone. Not only does the latest IMF Article IV report (the in-house name for annual economic surveys of member economies) concede that Mr Osborne’s austerity plans are “justified under the baseline scenario”, it even goes so far as commending his barmy new fiscal surplus rule – though mainly because of its transparency rather than its good sense.
Even the Fund’s conclusion about the EU referendum – that it is a risk to the economy but is difficult to quantify – is a little dull.
However, as is often the case, there are some more interesting technical findings buried away in the report. The first come in a lengthy section about Britain’s enormous and persistent current account deficits, which are comfortably the worst in the developed world. Given a current account deficit is something that often precedes a serious economic crisis, this is something too many people are ignoring.
The “selected issues” paper is well worth a read – more so perhaps than the main report – if only for its analysis on this, a subject which has perplexed many an economist. The big question is why Britain’s stream of income from overseas, which has typically been a perennial source of profits for the UK balance sheet, has now turned into a drain. On this front, the IMF trots out some of the standard responses: that the return from overseas assets is falling and so on, but adds another intriguing one: Might George Osborne’s corporation tax cuts have been responsible too?
According to the Fund, the Chancellor’s cut in marginal business tax rates from 30% to 21%, alongside changes in international tax treatment:
This change may have led UK investors abroad to repatriate earnings that used to be reinvested abroad. Since reinvested earnings are accounted for in the balance of payments as outward FDI (as well as income inflow), the shift to repatriation would have reduced the stock of FDI abroad
The Fund also has another interesting idea: might banking fines have pushed up the deficit? It says fines paid by misbehaving banks to overseas regulators might have had a noticeable impact on the balance of payments – though it says the effect is not enormous.
The report also contains a warning (again, you have to dig deep to find it) about the commercial property market. While there is always plenty of attention on residential property prices, the behaviour of commercial property values in recent years has been even more outrageous. Indeed prime London prices are far, far above their pre-crisis peaks.
CRE [commercial real estate] is particularly sensitive to swings in sentiment about economic prospects. Since many firms rely on CRE as collateral to support their borrowing, a fall in prices could tighten corporate credit constraints, reducing business investment and economic activity. Such an event could also have negative outward spillovers via the sector’s cross-border financial linkages