IMF may review policy after ‘getting it wrong’

Analyses showing that the IMF had completely underestimated the effect of austerity on jobs and growth would be considered very carefully, Christine Lagarde, the head of the Washington based body, has said.

She did not say whether the IMF would change its formula for dealing with countries needing a bailout.

Olli Rehn, European economics Commissioner, said he had not yet read the document but said he rated the IMF’s research highly.

“The IMF’s work in economic and policy analysis is always of a very high quality,” he said, adding that he would read the document on his way to the annual congress of the IMF and the World Bank which starts in Toyko today.

Finance Minister Michael Noonan indicated he would not request that the IMF review the formula it uses when assessing the effects of its policies on growth.

“That is something for the IMF,” he said.

For Ireland’s part, he said, “We have a programme to follow. We are spending more than we collect in tax and we have to balance the budget.”

It was a matter of trying to achieve a balance and not injure growth and jobs.

Forecasting growth was not an exact science, there are a variety of estimates of what Ireland’s growth will be this year, he added.

The research was carried out by two IMF economists, including its chief economist, and it looked into why over the past 30 years the IMF had got its growth forecasts wrong for 28 different countries.

The margin of error had increased since 2009 to become what economist Tom McDonnell of the think-tank TASK said was “very significant” . They found that their assessments were the most inaccurate, followed by those of theEuropean Commission, the Economist Intelligence Unit and the Paris based government funded OECD.

Their conclusion was that they under-estimated the effect of taking a specific amount of money out of an economy through tax increases and cuts in state spending. Consequently when drawing up austerity programmes which were supposed to cut back on overspending but allow sufficient for growth, their estimates have forecast the effect would be much less than it has been in reality.