Has the IMF Vindicated Trussonomics?

No, it hasn't...

According to the IMF the UK is the only major economy which looks set to shrink this year. Even sanctioned hit Russia is forecasted to perform less badly (and you thought my posts were gloomy). Now I’m not sure if the forecast for Russia is completely accurate given that it’s hard to get a clear picture of what’s going on over there for obvious reasons. However, it is bad news for the UK regardless and I’ve been banging on about this for some time and it was one of the reasons I started this blog.

Anyway, it’s got people sharing headlines from the time of the mini-budget where the IMF warned against the Truss-Kwarteng tax cuts. Those doing it are essentially saying that Truss has now been vindicated, the emergency fiscal statement from Hunt was a mistake, and the country is in dire need of tax cuts. These people are wrong.

Now it is true in other reports that the IMF has pointed to things like the increase in the headline rate of corporation tax as a reason for sluggish projected growth, this is not what it is saying now and nor is it an excuse for tax cuts. 

As I’ve pointed out before on this blog and elsewhere, tax cuts should not have been the priority for the UK. Many of the cuts outlined in the mini-budget would have done very little for economic growth which would not have been realised for quite some time. In the meantime the government would have gone on a debt fuelled binge to fund day to day spending and the poorly targeted support package. This is what spooked the markets and caused the IMF to issue its warning.

I wasn’t a supporter of everything in the emergency fiscal statement as I felt that it was probably too heavy handed but it’s worth remembering why it was so far reaching. The Truss government had done so much damage to the government’s economic credibility by sidelining and maligning respected institutions and being incredibly reckless. The new Chancellor had very little choice but to go above and beyond what was probably needed in order to restore trust and confidence.

Now, this isn’t to say that the UK isn’t in need of tax reform. As I said on Friday, Jeremy Hunt should look at simplifying the tax system and extending the Super Deduction in order to incentivise business investment which would in effect be a tax cut but without having to call it that or lower the headline rate. We should also look at scrapping other damaging taxes such as stamp duty.

However, if I was swinging a big red box around in Whitehall then tax cuts really wouldn’t be my priority. What we desperately need is supply side reforms. I obviously pretty much don’t shut up about this here but we need to liberalise the planning system so that we can build millions of more homes and a lot more labs, increase the number of nuclear power plants, wind turbines, and solar panels, and improve transport infrastructure. We also need a lot more immigration to help fill the record number of vacancies.

It’s also quite apt that the IMF forecast has come out on the anniversary of Brexit. The UK has seen reduced trade and investment as a result which is damaging our economy. I’m not a Rejoiner and I don’t think the country has much appetite to rejoin or the government the bandwidth to negotiate it. However, we do need to urgently fix our relationship with the EU. My preferred option would be for the UK to rejoin the Single Market at some point down the line but right now the government needs to reduce friction as much as possible in order to facilitate trade and increase investment.

The country is in a mess and we look set for sluggish growth for years to come. However, this is not a vindication of the Truss-Kwarteng mini-budget. We need to focus on supply side reform and improve our relationship with the EU if we have any hope of getting out of this mess.