The IMF is still obsessed with the absurd “fiscal space” concept. I’ve explained the flaws in the idea before on this blog (starting in 2012) but I’ll run through it again and I’ll concentrate in particular on this article published in 2018 by IMF authors. Article title: “Economic Preparedness: The Need for Fiscal Space.”
Note that this IMF article is not any sort of “one off”: that is, IMF authors turn out articles on astrology - sorry I mean “fiscal space” - regular as clockwork. Three more articles from 2018 alone are listed at the end below.
The “Economic Preparedness” article does have a warning to the effect that the article “does not necessarily represent the views of the IMF….”. However it’s clear from the numerous articles published over the years by the IMF on fiscal space that the article does in fact represent the views of the IMF.
Anyway, the first two sentences read, “When a government looks to temporarily increase spending or reduce taxes, it needs to gauge whether it will be able to fund the resulting budget gap without risking an unfavorable reaction from financial markets or undermining the longer-term health of public finances. The more confident it can feel about this, the more fiscal space it has.”
In other words, the big question according to the IMF that faces a country wanting to run a deficit is: can the country borrow the necessary money without pushing up the rate of interest it pays on its government debt too far? Or as the article itself says later on, the degree of fiscal space is determined by, among other things, the “ease of borrowing”. Or as the article says in the penultimate paragraph, “ease of access to markets” is important.
Well now, that idea flatly contradicts the point made by Keynes in the early 1930s, namely that in a recession, a country which issues its own currency should borrow or print more money and spend it. That is, “access to markets” is not needed at all, since the latter sort of country always has the “print” option!!!
Indeed, the print option is exactly what several large economies have gone for, and big time, during the recent recession. That is, they have borrowed large amounts, spent the sums borrowed, and then almost immediately had their central banks print money and buy back relevant government bonds (i.e. those countries have implemented QE) That nets out to the above Keynsian “print and spend” policy.
You really have to wonder whether the IMF has actually heard of QE, don’t you?
Of course, the print option is only available to countries which issue their own currencies. That is, that option is not available to individual countries in the Eurozone (though the option is available to the Eurozone as a whole).
As for any idea that “markets” might lose confidence in the debt of a country that implements the latter “print and spend” policy, markets have no reason to lose confidence as long as print and spend is not taken so far that it causes excess inflation. After all, what bond holders are mainly concerned about is any possible loss in the real value of their bonds caused by excess inflation. And that responsible attitude to inflation is exactly the attitude adopted by the larger developed economies since the recession that started in 2008. That is, the large economies that have implemented print and spend have actually kept inflation well under control.
Of course the above paragraphs are not intended to suggest there is no relationship at all between the amount of government borrowing and interest rates. That is, if a government issues more debt than the private sector is willing to hold at X%, then government will have to pay a higher rate. But if interest on the debt is significantly above zero, then there is no need to “access markets” so as to impart stimulus: that is, the relevant country can cut interest rates (by printing money and buying back government debt).
Indeed the latter is very much what the UK Labour Party’s new so called “fiscal rule” consists of: that is the rule is basically that if interest on the debt is significantly above zero, then interest rate cuts should be used to provide stimulus, and if interest on the debt is near zero, then fiscal stimulus (i.e. “borrow and spend”) should be used.
And the latter rule is not a hundred miles from the MMT idea that interest on the debt should be kept permanently at or near zero.
The conclusion is that the IMF hasn’t the faintest idea whether it’s coming or going. It is totally and utterly incompetent. It is economically illiterate.
Other IMF “fiscal space” articles from 2018.
1. IMF Board Takes Stock of Work on Fiscal Space (published 2018). https://www.imf.org/en/Publications/Policy-Papers/Issues/2018/06/15/pp041118assessing-fiscal-space
2. Boosting Fiscal Space : The Roles of GDP-Linked Debt and Longer Maturities
3. IMF Fiscal Monitor: Capitalizing on Good Times, April 2018