Chancellor advised by IMF chief economist Olivier Blanchard, at Davos, that time has come to moderate austerity programme
George Osborne has insisted he will press ahead with the government’s austerity plans despite a warning from the International Monetary Fund saying the chancellor should slow the pace of cuts.
Speaking on the eve of the latest GDP growth figures for the UK economy, the chancellor said the credibility Britain had built up by setting out a tough package of tax rises and spending plans had been “hard won, and easily lost”, adding that it would be “a huge mistake to put that at risk”.
The IMF’s chief economist, Olivier Blanchard, said the time had come for the chancellor to act on the IMF’s repeated warnings that if the economy remained weak he should moderate his plans.
Blanchard told the BBC’s Today programme: “We said that if things look bad at the beginning of 2013 – which they do – then there should be a reassessment of fiscal policy. We still believe that. We’ve never been passionate about austerity. From the beginning we have always emphasised that fiscal consolidation should be slow and steady.”
Osborne stressed that he had already adjusted his plans to the weaker-than- expected economy, when he used last month’s autumn statement to announce that fiscal consolidation would now extend until 2017-18.
“It is credible, it is flexible, and we have already exercised that flexibility,” he said.
The Office for National Statistics will publish its first estimate of GDP growth for the final quarter of 2012 on Friday, amid forecasts that the economy has declined by up to 0.4% and is on the cusp of a triple-dip recession.
The IMF has shifted its position dramatically since the start of the financial crisis, from enthusiastically backing the austerity plans being enacted across Europe, to warning that they could be depressing growth.
Labour seized on Blanchard’s remarks as vindication of their argument that the coalition was cutting too far, too fast.
“The longer the government clings to its failing plan, the more long-term damage they will do to our economy,” said Ed Balls, the shadow chancellor.
However, a Treasury source played down the significance of the remarks, saying “it’s well known that there’s a debate within the IMF, and Olivier Blanchard is at one end of it”.
Blanchard caused consternation among Europe’s leaders last year when he said the IMF had drastically underestimated the fiscal multiplier, a calibration measuring the damage caused to economic growth by public spending cuts.
With the Office for National Statistics due to publish its first estimate of GDP growth for the final quarter of 2012 on Friday, Osborne, who would have already seen the data before he spoke in Davos, repeated his familiar mantra – “we are walking a difficult road, but we are heading in the right direction”.
He highlighted the latest unemployment figures, which showed the fastest pace of job creation for more than 20 years.
Speaking a day after David Cameron pledged to try to renegotiate Britain’s relationship with the EU, and then offer the public a referendum on EU membership, Osborne backed the prime minister’s stance and said Britain hoped to spearhead reforms within the EU.
“Europe needs to change, to meet the expectations of all its peoples, no matter what country they live in,” he said. “Europe has to become a competitive place, where companies can be secure, jobs are created, and young people have careers.”
Without reforms, he said, European countries would inevitably lose out in the “global race” with fast growing rivals in the emerging world. “I think western governments face a choice: they’re going to either be able to keep up with these success stories, or they’re not.”