IMF comes to Osborne’s rescue
The negative impact of harsh spending cuts on Britain’s economic growth is only “temporary”, the International Monetary Fund (IMF) has said.
George Osborne received vital backing from the influential global body after coming under attack from senior economists yesterday.
The IMF, whose staff have spent the last two weeks in London going over the Treasury’s books, acknowledged that high inflation, low consumer confidence and and indirect tax rises were hitting the UK economy.
It downgraded its prediction for the UK’s 2011 growth from two per cent to 1.5%, but emphasised it was only doing so because of the unexpectedly poor performance in the first quarter.
“These developments raise the question of whether it’s time to adjust the macroeconomic policy strategy,” acting IMF managing director John Lipsky told journalists in a press conference at the Treasury.
“According to IMF staff analysis, the answer is no. We expect the deviations from the economic trajectory that had been forecast to be largely temporary.”
He said medium-term GDP growth would settle at about 2.5% and pointed out that unemployment, “while unacceptably high, appears to have stabilised”.
Improving exports, investment from overseas and a recovery in private sector employment would contribute to the eventual improvement, the IMF said.
Stuttering GDP growth had prompted criticism yesterday from dozens of senior economists, who used a letter to the Observer yesterday to criticise Mr Osborne’s “self-defeating” plan to slash spending during this parliament.
The Organisation for Economic Cooperation and Development suggested last week that the Treasury may have to slow down the pace of spending cuts and tax hikes because of the British economy’s poor performance.
Mr Lipsky acknowledged that the deficit reduction plan would “create some headwinds for near-term growth” but added it would “also assist disinflation and thus it can be countered if necessary by looser monetary policy than would necessarily be the case”.
Earlier the chancellor insisted that “choppy economic conditions” would not deter him and cited numerous international organisations praising the UK’s decisive approach.
“The rock upon which the stability of the British economy stands is our credible fiscal plan,” Mr Osborne told the Today programme.
“There are many, many business organisations, economists, and basically all the international bodies who support the difficult decisions that we have taken over the last 12 months to put the economy we inherited back on track.”
Mr Osborne suggested the verdict of the markets was the most important judgement.
“They have taken the view that the UK is a safe bet at the moment,” he added, claiming this reflected “the confidence we have earned out there in the international community”.
“That means businesses and families are enjoying much lower interest rates that Greek families or Portuguese families… that is a monetary stimulus for the British economy that would not be there otherwise.”
Concerns about the slow rate of economic recovery from the recession, which has seen GDP growth broadly stagnate in the last three quarters, are unlikely to disappear soon.
“We’re now set for slower growth, higher inflation and higher unemployment than was forecast a year ago,” shadow chancellor Ed Balls said yesterday.
“And the result is that the government is now set to borrow £46 billion more than they had planned.”