Ken Clarke is right on the IMF

Ken Clarke is correct to state that there is a risk of the UK having to call in the IMF if there is a hung parliament. The reason is simple. The Budget Forecast was that the National debt would reach £1400bn in 2014. This will be around 85% of GDP. For this to be a peak the following has to happen.

  1. The economic recovery has to be rapid. Yet IMF thinks Darlings forecasts too optimistic.  
  2. Most of the deficit reductions come from this strong economic growth, not from expenditure cuts and tax rises.
  3. A hung parliament would mean including the Liberal-Democrats. Their tax increases rely on cutting tax avoidance and increasing taxes to the rich. Such tax rises are unlikely to generate the necessary revenue AND they would be a disincentive to invest in the UK.
  4. Labour sharing power might be worse than Labour on their own for indecision. They have put off a comprehensive spending review, despite a huge change in the Government’s finances. Further they may further put off starting cutting expenditure. It will be damage a party who has said for so long “Labour Investment or Tory cuts” to start cutting.
  5. Further, if they sincerely believe £6bn (0.5% of GDP) cut in waste might tip the economy into recession, then they would also baulk at real cuts necessary to make the deficit peak at 85% of GDP.
  6. The main spending cuts are unspecified. A coalition government might dither at signs of protests from much of the state sector. The IMF could be called in the muscle through the necessary cuts.
  7. There could be another external shock. If interest rates rise, then consumer spending will fall. Also house prices could resume their downward path. Also interest rates rising will also mean an increased deficit. By 2014 each 1% rise in the average level of interest on the debt will add £14bn to the deficit.

 

Extending the period of cutting the deficit, has a compound effect. If each year the target deficit is missed by 1% of GDP, then after 5 years it is over 5% of GBP extra.

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