Social-Security Cuts Will Cause Economic Damage, IMF Report Reveals

by richardhutton

Although the media has largely ignored it, the International Monetary Fund recently acknowledged that cutting public expenditure will damage the economy in countries such as Britain. It wasn’t candid enough to make this explicit – instead, the explanation was provided in a short sub-section within a 250 page report; and was written in a highly complex idiom, liable to easy misunderstanding:

“We find the coefficient on planned fiscal consolidation to be large, negative, and significant”[1].

The import of this is virtually impossible to discern without being put in context: ‘fiscal consolidation’ is the IMF’s euphemism for deficit reduction – that is, cuts to public expenditure. ‘Coefficient’ is their synonym for unemployment[2]. What this really amounts to is that, having compared the actual growth of Gross Domestic Product to the predictions they made in 2010, the IMF are almost brave enough to accept that they significantly underestimated the impact of austerity policies on economic recovery – and overestimated the ability of these policies to encourage economic growth.

But, is it clear that cuts to social security actually damage the economy? Yes: the IMF accept that for every pound cut from government spending, the reduction of economic activity as a whole is between 90 pence – £1.70: which is potentially far higher than the one pound-per-pound ratio that their original predictions were based on[3]. So, cutting £10 billion public expenditure on welfare will cost the economy between £9 billion – £17 billion.

What makes the IMF’s report particularly significant is that the IMF themselves demanded cutting public expenditure in the name of economic growth: the reality is that these cuts are – at best – failing to encourage growth; and are potentially costing the country much more than they are saving.

Shortly after they issued their report, the IMF suggested that Britain should defer further cuts to public expenditure[4]. By contrast, at the Conservative party conference, the Chancellor George Osborne vowed to cut a further £10 billion more from public spending on social security, on top of the £18 billion already scheduled for removal[5].

So it makes no financial sense to keep cutting expenditure on welfare. The need for it has not diminished – on the contrary, it has increased steadily during the last two years. But, if cutting it amounts to financial mismanagement, and undermines the economy, then what reason does the government have for pursuing the reduction of social security?


[1] Box 1.1., p. 41 in World Economic Outlook by the International Monetary Fund; October 2012: http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/text.pdf

[2] Firstly, the IMF determined that this was “not driven by crisis economies”, nor by the “role of sovereign debt problems”; it then tested variables including “pre-crisis external imbalances”, “systemic banking crises”, “financial market stress”, and deemed these not to have been responsible. It is the austerity measures which are. Unemployment was deemed to be the single-most significant factor. See p. 41 in World Economic Outlook by the International Monetary Fund; October 2012 http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/text.pdf

[3] For a much more expert analysis than I can offer here, see Keynes was right, IMF admits. And the deficit fetishists are wrong by Owen Tudor cf. TouchStone; 9th October 2012: http://touchstoneblog.org.uk/2012/10/keynes-was-right-imf-admits-and-the-deficit-fetishists-are-wrong/

[4] “If growth should fall significantly below current … projections, countries with room for manoeuvre should smooth their planned adjustment over 2013 and beyond. This includes … the United Kingdom,” (ellipses in original), quoted in IMF says UK should defer spending cuts if growth disappoints by Reuters; 9th October 2012: http://uk.reuters.com/article/2012/10/09/uk-imf-britain-idUKBRE89801S20121009

[5] See:

“In his speech in Birmingham, the chancellor made clear he was not planning to change course and said a further £16bn of savings must be found by 2015/16 to meet his target of balancing the budget within five years. This, he said, would include cutting £10bn more from the welfare bill by 2016-17, on top of the £18bn announced in 2010”

in Tory conference: George Osborne in £10bn benefit cut vow by Brian Wheeler, CF. BBC; 8th October 2012: http://www.bbc.co.uk/news/uk-politics-19865692

These cuts to public expenditure could potentially cost the economy £57.8 billion.

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