IMF: We got effect of austerity wrong

The IMF has admitted it completely underestimated the effects of austerity on the Irish economy and believed the tax increases and spending cuts would not have cost so many jobs.

The revelation comes in three pages of academic analysis tucked away in the body’s annual report being released in Tokyo today where the IMF and the World Bank are holding their annual congress.

The report says the IMF believed that for every €100 of austerity through higher taxes and spending cuts, the effect on economic growth and unemployment would be the equivalent of €50.

But in reality the effect has been between double and three times that — stripping the economy of €90 to €150 for every €100 taken out in budgets agreed with the troika.

Tom McDonnell of the independent think-tank Tasc said the report called into question the Government’s budgetary strategy.

“It suggests recent budgets have actually been more damaging to the Irish economy than the Government was estimating. It would also help explain why growth has been lower over the last few years than the Government had expected — and why the vaunted ‘return to growth’ has failed to substantively materialise.”

The findings show Ireland had the second highest austerity measures in the developed world in 2010 — Greece had the highest.

The main conclusion of the report, prepared by the IMF’s chief economist Olivier Blanchard with Daniel Leigh and based on data for 28 economies, is that their estimates for the effect of austerity have been too low since the start of the recession in 2008.

They say their calculations on the accumulated effect of austerity measures that would cut GDP by 1% were wrong, underestimating lost investment, GDP growth, and domestic demand.

The errors in forecasting the unemployment rate are described as “large and significant”.

The economists also studied the GDP forecast errors of four groups. They found that the IMF had the highest level of error followed by the European Commission, the Economist Intelligence Unit (privately owned), and the OECD.

The economists conclude that more work is needed on how the effects of government spending change with time and economic conditions.

Finance Minister Michael Noonan said he had not yet seen the report but that the question of too much austerity had been raised by the IMF before, and it was always a consideration for any finance minister.

The report does not say if the IMF has changed its model for the latest forecasts. They predict a further reduction in EU and global growth from 2% to 1.5% for developed countries, and from 6% to 5.6% for fast-growing emerging markets.

The report notes that Ireland is the only EU economy in a bailout programme that is not in recession.

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