IMF: “Fiscal Policies can Help Boost Countries’ Long-Term Growth Prospects”

July 9th, 2015
in Op Ed

by Dirk Ehnts, Econoblog101

Due to vacation I have been lying low, basically missing out on commenting on the Greek drama. There is not much to say anyway, except that this is about democracy (sovereignty) versus (neoliberal) Europe.

Follow up:

The euro basically is build on the idea that government cannot borrow from the central bank and hence faces a hard budget constraint. This means that sovereignty, defined by a government that can do policy-wise what it wants (after all, it was elected by popular vote) by accessing liquidity whenever it needs do (from the central bank if nothing else is available), went out of the window. Now Tsipras, the Greek prime minister, has no economic instruments to fight unemployment (no access to more money) but his voters first priority is lower unemployment. With their own currency, the Greek government would be able to deliver that. With the troika, the Greeks depend on the good will of the other side, which is non-existent. So much for that.

Now the IMF has published a timely IMF survey the stub of which reads:

Strong and Equitable Growth: Fiscal Policy Can Make a Difference

Jeff Danforth, Eva Jenkner, and Rossen Rozenov
IMF Fiscal Affairs Department

June 30, 2015

  • Fiscal policies can help boost countries' long-term growth prospects
  • Complementary structural reforms magnify growth dividends
  • Social dialogue and attention to equity key to building public support for reform

Amid a recovery from the financial crisis that continues to disappoint and growing fear that the global economy is entering a prolonged period of mediocre growth, a new IMF study says that fiscal policy can actually lift potential growth.

Sadly, the text continues with the usual neoliberal "reform" ideas:

How fiscal reforms are designed and implemented is an important determinant of their success in generating strong and sustained growth. First, inclusion of fiscal measures in a package with other complementary reforms increases the likelihood of success. In the majority of the countries studied, successful fiscal reforms were implemented together with other structural reforms and macroeconomic policies. For example, to boost employment, countries combined strengthened work incentives with labor market reforms aimed at facilitating job creation, such as streamlined hiring and firing procedures, changes in wage bargaining, and minimum wage cuts. In other cases, reducing government debt and deficits to create room for corporate tax decreases was pursued simultaneously with economic deregulation and privatization.

What I find especially puzzling here is the last sentence:

"reducing government debt and deficits to create room for corporate tax decreases".

I remember two instances when this was tried. The US with Bush ("W") in the early 2000s, which led to a period of job-less growth, and the German government in the early 2000s, with the result of a period of below-par growth ("sick man of Europe"). I also find it hard to believe that there is no mention of a fallacy of composition argument. If all countries decrease their corporate taxes simultaneously, then nobody would be gaining any competitiveness, right? I still find that the IMF is not delivering a balanced view on economic policy but clings to its neoliberal agenda. Its writings should perhaps be treated as opinion, not free of conflict of interest.

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