This may come as a bit of a shock to Andrew Coyne and Jim Flaherty, but even the IMF are warning in their most recent fiscal policy update that austerity in the advanced economies is going too far, and will dampen growth.
Indeed, they even suggest that too much austerity may spook the dreaded bond markets.
“Further declines in cyclically adjusted deficits could be undesirable not only from a growth perspective, but possibly from a market perspective as well. While smaller deficits and debt ratios do lead to lower borrowing costs, other things equal, advanced economies with faster output growth are also currently benefiting from lower spreads. This likely reflects in part concerns about the feasibility of fiscal consolidation and solvency in an environment of very weak growth.Thus, further tightening during a downturn could exacerbate rather than alleviate market tensions through its negative impact on growth.”
Figure 3 shows that countries with the largest discretionary reductions in their deficits (negative changes in the cyclically adjusted budget balance) will have the slowest rate of growth in 2012.
And Figure 4 shows that countries with the highest growth rates will enjoy the lowest interest rates.
The IMF estimate the change in the all government Canadian cyclically adjusted budget balance to be minus 0.6% of GDP between 2011 and 2012, and minus 0.7% between 2012 and 2013. In plain language, that is the change in the balance due to spending cuts (or tax increases, though I don’t see any on the horizon.) Earlier IMF work suggests that a minus 1% change of GDP in the balance implies a o.5% increase in the rate of unemployment.
The IMF estimates likely do not fully reflect the scale of pending cuts in the coming round of federal and provincial Budgets.
Finally, one has to be more than a bit puzzled why the IMF staff are issuing such useful reports, while other IMF staff are actively engaging in imposing draconian and self-defeating austerity programs.
- Niall Ferguson’s Latest Idiocy (May 5th, 2013)
- Beating Back the Ghosts: Be Gone Appeals to Reinhart and Rogoff Authority. Welcome the Triumph of Reason. (April 16th, 2013)
- Back to Balance in Nova Scotia (March 25th, 2013)
- Budget 2013: Time for a real action plan, not another ad campaign (March 19th, 2013)
- Breaking The Taboo on Monetizing Deficits (February 22nd, 2013)