Bailouts of troubled industries unlikely to stimulate global demand, says IMF

WHOLESALE TAX cuts or bail-outs of troubled industries like the automotive sector are likely to waste government money while doing little to stimulate the global economy, the International Monetary Fund (IMF) warned yesterday.

As governments worldwide cut taxes and boost spending to combat the global recession, a study by the IMF said such programmes must be large but carefully designed.

“There is a strong case for doing too much rather than too little,” said Olivier Blanchard, the fund’s chief economist.

But, he added, tax cuts should be aimed at people likely to spend money rather than save it.

Although the IMF said it would resist giving a running commentary on policies, Mr Blanchard said signs of the stimulus plan emerging from the camp of US president-elect Barack Obama appeared to be hopeful. “The size corresponds roughly to what we think is needed,” he said.

Tax cuts needed to concentrate on individuals who were having difficulty getting access to credit rather than those who were saving instead of spending.

Mr Obama’s team is reportedly considering a fiscal stimulus worth $675 billion to $775 billion, (€482 billion to €553 billion) or 5 to 6 per cent of US gross domestic product, likely to include substantial long-term investment spending.

The IMF cast doubt on small cuts in value-added taxes, such as that announced by the UK, as a way of boosting the economy.

While the fund said the UK’s policy of pre-announcing the reversal of the cut would help reassure investors about government borrowing, “it is questionable whether decreases in the VAT of just a few percentage points are salient enough to lead consumers to shift the timing of their purchases”.

The fund said focusing help on high-profile sectors such as the car industry was likely to be perceived as unfair and could set off tit-for-tat protectionism.

The fund, whose economists were among the first forecasters in the official sector to recognise the extent of the global downturn, said governments should apply a range of spending increases and tax cuts to their economies, given the uncertainties about which might work.

“Governments don’t want to put all their eggs in the same fiscal basket,” said Carlo Cottarelli, director of the fund’s fiscal affairs department.

Meanwhile it was unclear last night whether moves on Christmas Eve in the United States directed at preventing the collapse of General Motors (GM) were going to be successful.

GMAC, the sprawling financial services group crucial to GM’s turnaround, kept silent on its next move after the expiry last Friday of a debt-exchange offer required to strengthen its capital.

By midday yesterday GMAC had still not announced results of a $38 billion debt swap, which was part of a plan to raise enough capital to become a bank holding company so that it could access the US government’s relief package for the financial industry.

Even as the debt exchange appeared to be foundering, the Federal Reserve last week blessed GMAC’s application to become a bank holding. As of December 17th, the exchange had only garnered 54 per cent participation versus the 75 per cent target the company had set.

“In light of the unusual and exigent circumstances . . . the board has determined that emergency conditions exist that justify expeditious action on this proposal,” the Fed said. It added: “The board has also considered the steps taken by the Department of Treasury to provide assistance to GM and thereby help ensure the viability of a major business partner of GMAC.” – (Financial Times service)