23 Dec, 2008

IMF criticises the UK’s VAT cut

An International Monetary Fund (IMF) economist has criticised the UK’s 2.5-percentage-point cut in spending taxes. Olivier Blanchard, the IMF’s chief economist, said that the temporary cut in VAT would not significantly influence shoppers’ behaviour. In an interview with French newspaper Le Monde, Mr Blanchard said he did not think the cut was “a good idea”. He also reiterated the IMF’s call that governments should be ready to spend more to stimulate their economies. Mr Blanchard’s comments were seized on by Britain’s opposition Conservative politicians, who have argued against the effectiveness of the VAT cut. Shadow chancellor George Osborne described Mr Blanchard’s remarks as Prime Minister Gordon Brown’s “nightmare before Christmas”. Conservative leader David Cameron has previously warned that the UK cannot afford to borrow to provide the funding for the temporary cut, which is due to remain in place until January 2010. ‘Exceptional crisis’ In his interview, Mr Blanchard said: “Temporarily cutting VAT, a measure that was adopted in Great Britain, does not seem to me to be a good idea – 2{6060b2de664e4eaa3e7b7e86961ce2c4bbd7a29b6c1097abf8257a4e5b07383e} less is not perceived by consumers as a real incentive to spend.” In contrast, he said a French plan aimed at encouraging consumers to buy cars was a good idea. Mr Blanchard re-stated the IMF’s position that governments should do more to stimulate demand if the world was to avoid a depression similar to that of the 1930s. “We are faced with a crisis of exceptional size, of which the biggest component is a collapse in demand. Consumer and business confidence indexes have never fallen so far since they began. The coming months will be very bad,” he said. “It is imperative to stifle this loss of confidence, to restart household consumption, if we want to prevent this recession developing into a Great Depression.” Mr Blanchard called on Germany, in particular, to boost its spending in the next few months. “If Germany did not participate sufficiently in this stimulus, many other countries would also hesitate to do so and the effect would be disastrous for Europe,” he said. The German government has said it will review its stimulus programme in January, to see if more spending is necessary. Most governments of the world’s major economies have announced stimulus plans in recent weeks, amid mounting gloom, but the IMF has repeatedly warned that the packages do not go far enough. The IMF has said countries should be prepared to spend up to 2{6060b2de664e4eaa3e7b7e86961ce2c4bbd7a29b6c1097abf8257a4e5b07383e} of the world’s gross domestic product in their plans to boost economic growth. However, Mr Blanchard warned that even more money might be needed. “If the circumstances require it, states must be ready to do more – 3{6060b2de664e4eaa3e7b7e86961ce2c4bbd7a29b6c1097abf8257a4e5b07383e} or more if necessary – we must think about it now because it is not easy to spend such large sums of money efficiently.” Commenting on Mr Blanchard’s remarks, shadow chancellor George Osborne said: “This is Gordon Brown’s nightmare before Christmas. One of the most respected and senior economists in the world has just said that Gordon Brown’s temporary VAT cut, the centrepiece of his plan for the recession, is not a ‘good idea’. “The recession is getting deeper, and Labour is bankrupting Britain again.”

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