IMF cautions against severe austerity

Those working to preserve public services – including health care – may have found an unlikely ally in the IMF (International Monetary Fund).

After having pressed for severe cuts to public services in nations facing high public debt, the IMF is now cautioning that cutting too quickly may worsen the economic crisis.

This comes after weeks of dire predictions by Reform Commissioner Don Drummond, whose recommendations are due out today.

If Drummond’s recent trial balloons are anything to go by, he will be asking the Ontario government to cut much harder and much faster than anticipated during the last election – this despite recent improved economic forecasts.

Carlo Cottarelli, the IMF’s Director of Fiscal Affairs, suggests that while markets may react against large debt and deficit nations, aggressive cost cutting may be counter-productive. What investors also like is economic growth.

Writes Cottarelli: “When countries tighten fiscal policy and the economy slows, some of the gains from better fiscal fundamentals will be lost through lower growth.”

Ontario is not Greece. Ontario has plenty of room to maneuver without resorting to selling off the furniture to pay the mortgage.

In fact, according to economist Jim Stanford, while debt is higher, low interest rates mean we are paying about the same to service our debt as we were a decade ago.

The IMF recommends a more gradual response to debt, advice Premier Dalton McGuinty should take heed of when addressing the Drummond report.

During the last election the parties argued to limit overall spending to increases of 2 per cent per year. Despite an improving fiscal situation, Drummond is floating trial balloons that suggest the cap may be as tight as 0.5 per cent.

Nobody ran on that platform.

A cut of that magnitude could cause the province’s economic recovery to slow or even slip back into recession.

That would only make our debt situation worse and sacrifice the standard of living for most of us.

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