Suggestions that Britain’s borrowing and debt binge could lead Labour to seek a bailout from the International Monetary Fund (IMF) are airily dismissed by Rachel Reeves. She told the BBC: ‘I don’t accept that, and I think most serious economists don’t accept that either.’
Hopefully, the Chancellor is right. As someone who reported first-hand on the traumatic IMF rescue of James Callaghan’s government in 1976, I would not wish the experience on Britain again.
But when governments find it impossible to win support domestically for bold policies, such as cutting the UK’s bloated welfare bills, the IMF can offer cover for tough political decisions.
Reeves was responding to former Bank of England rate-setter Andrew Sentance and former National Institute for Economic and Social Research forecaster Jagjit Chadha. Both have argued that Britain may be facing a debt crisis like the 1970s. Whether the Chancellor agrees or not, disputing their reputation as ‘serious economists’ was uncalled for.
Britain’s experience with the IMF in 1976 left an indelible mark on Labour and the Treasury, with Britain, perhaps more than any other wealthy G7 nation, regarding the Washington-based lender with reverence.
It was there that ex-Chancellor Norman Lamont put down the roots for an independent Bank of England, when he announced the creation of a monetary policy committee and an inflation target. George Osborne, as Chancellor, wheeled out the IMF’s then-managing director Christine Lagarde during the Brexit referendum in 2016. Lagarde’s successor, Kristalina Georgieva, took the reins in 2019.
In charge: Kristalina Georgieva (pictured) took the reins at the International Monetary Fund in 2019
It is no coincidence that Kwasi Kwarteng, Liz Truss’s Chancellor, was ejected from the Treasury while flying back from an IMF meeting where he had been given a dressing down by the top brass and then-US Treasury Secretary Janet Yellen. And Reeves chose to unveil her iron-clad fiscal rules at the IMF in the autumn of last year.
As an economics writer for a national newspaper in 1976, for me the events leading up to Britain’s humiliation are etched in my memory. Despite Reeves’ defiance, they are not so different to current circumstances.
While the bets against the Chancellor’s economic leadership have yet to reach the levels of those in the 70s, they are still damaging.
There has been no collapse in the currency and the Bank is not draining the country’s reserves, but the upward march of Government borrowing costs, which rose to a near-30-year high last week, will ramp up pressure for drastic action. Britain was a different place in the 1970s. The trade unions may be an irritant now, but they held the whole country to ransom then. Food imports rotted on the docks, the National Union of Mineworkers was in the hands of militants and rat-infested rubbish filled London’s streets.
As evidence grew that Britain was going bust, the pound went into freefall. The remnants of its imperial past made the UK particularly vulnerable, as pounds held by former colonies and others were easy prey for Swiss speculators, disparagingly dubbed the ‘gnomes of Zurich’ by ex-Prime Minister Harold Wilson. These were the forerunners of the hedge funds now shorting the pound, banking on Britain being buried under a debt mountain again.
The sterling rout reached its crescendo on September 28 when the then-Chancellor Denis Healey was at Heathrow about to board a flight to the IMF’s annual gathering. It was there in the VIP suite, having consulted with the Bank, Treasury and Downing Street, that he made the fateful decision to return to No 11. Hours later, it was announced that the UK would be seeking a bailout from the IMF.
The price of the loan was a humiliating ‘letter of intent’ negotiated with the IMF and US President Gerald Ford’s top Treasury official Paul Volcker. Never one to take prisoners, Volcker demanded the harshest terms.
In exchange for a bailout, Labour had to take an axe to public spending of £7 billion over two years – equivalent to £70 billion today.
Talking to Healey, years later, he told me the cuts had been a cruel and unnecessary burden as the public finances were already heading in the right direction because of tax increases.
The terrible toll of the cuts will never be forgotten. That explains why Reeves was so anxious to quash speculation of IMF involvement in UK affairs. Yet a struggling government trying to deliver cuts to a bloated state in the face of market eruptions, may, in the last chance saloon, see an IMF stamp of approval as the only option.
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This article was originally published by a www.dailymail.co.uk . Read the Original article here. .