Christine Lagarde says IMF has changed its mind on UK's deficit reduction strategy due to weak economic figures
The head of the International Monetary Fund, Christine Lagarde, said on Thursday that the poor performance of the British economy had left her with no alternative but to call on George Osborne to rethink his austerity strategy.
Increasing the pressure on the chancellor to change course, Lagarde – who has previously given consistent and public support to the UK's deficit reduction strategy – said the fund had changed its stance as a result of weak economic figures.
She also signalled that an IMF team would conduct a thorough investigation into the health of the UK when it arrives in London to carry out its annual review under the Washington organisation's article IV programme. Lagarde said she "vividly remembered" the chancellor coming to a meeting of European finance ministers and confessing that he was not proud of "carrying the biggest deficit in the room".
The IMF had supported the government's attempt to tackle Britain's record peacetime budget deficit, but the backing had never been unconditional, Lagarde insisted. Despite suggestions from the Treasury that there was a split at the fund between pro- and anti-austerity factions, she gave full support to her chief economist, Olivier Blanchard, who warned Osborne this week that he would be "playing with fire" if he continued on his present course.
Lagarde said: "We have said that should growth abate, should growth be particularly low, then there should be consideration to adjusting by way of slowing the pace. This is nothing new. And this is still the position and one that has been very clearly articulated within the various departments.
"So we very much stand by that. Consideration should be given if growth weakens, and looking at the numbers, without having dwelled and looked under the skin of the British economy, as we will do in a few weeks' time under the article IV, the growth numbers are certainly not particularly good."
By the time IMF officials arrive in Britain next month, the Office for National Statistics will have released growth figures for the first quarter of 2013. These will show whether the UK has slipped into an unprecedented triple-dip recession.
The consensus among City economists is that the UK will next week narrowly avoid a third leg to the recession that began in 2008, but figures this week showing rising unemployment and lower high street spending have underlined the fragility of the economy.
Britain's growth performance has consistently undershot both government and IMF forecasts. This week, the fund's half-yearly World Economic Outlook cut its prediction for UK growth to 0.7% in 2013 and 1.5% in 2014 – a 0.3 percentage point reduction in both years. Osborne said in the budget last month that he expected growth of 0.6% this year, rising to 1.8% in 2014. Output is still around 3% lower than it was when the recession began in the first quarter of 2008.
"What has changed is clearly the quality of the numbers. But I would not, and I don't think anybody in this institution would want to prejudge ahead of the article IV, because that is when we spend three, four weeks discussing, debating, exploring, understanding, trying to go really under the skin of the economy, and we will do that," Lagarde said.
Osborne, who has already eased the pace of deficit reduction, is certain to resist any pressure from the IMF for a politically damaging U-turn.
Lagarde said the past year had seen the emergence of a three-speed global economy – those countries doing well, those on the mend and those that still had quite a distance to travel.
"Now, with strong interconnections, and uneven recovery, that three-speed recovery is not enough and what we need is a full-speed global economy." Lagarde said growth needed to be "solid, sustainable, balanced but also inclusive and very much rooted in green developments."
The IMF managing director said central banks were travelling in "uncharted territories" and would be more comfortable if they could return monetary policy to more normal settings.
Unconventional policies were required, Lagarde added, because interest rates were already low and there was "not much else at the moment to try to kickstart growth in economies, to lower long-term interest rates, and to actually provide that breathing space which the authorities have to use to actually deliver on their fiscal policies as well as their structural reforms".
Lagarde was also forced to answer questions about her own future. Next month she will appear before a French magistrate investigating an arbitration payment made to a former supporter of ex-president Nicolas Sarkozy when she was finance minister in Paris.
Lagarde said there was "nothing new under the sun" and she was ready to be heard in the case, involving businessman Bernard Tapie.
"A date has been set. It will be at the end of May and I'll be very happy to travel for a couple of days to Paris, but it's not going to change my focus, my attention and my enthusiasm for doing the work that I do," she said at a news conference in Washington.
The Treasury was not commenting on Thursday night but is understood to believe the IMF stance, far from being critical, is consistent with its previous support for deficit reduction.
There are, of course, key differences between 2013 and 1976. For a start, the IMF will not be telling the government to adopt austerity but rather to ease up on the pace of deficit reduction.
Secondly, Britain is not going cap in hand to the IMF for a loan. That means, finally, that George Osborne can politely tell Lagarde to take a running jump, which is what he almost certainly will do.
That said, a duffing up by the IMF would still damage Osborne, who has relied on Lagarde to give him cover for his deficit-reduction strategy. The IMF wants countries to reduce their debt levels but believes spending cuts and tax rises cuts in spending and increases in taxes are more than usually potent when interest rates are low, banks weak and many countries are seeking to push through austerity programmes at the same time. Britain provides a textbook example of what happens: growth weakens and deficit reduction falters.
Guardian
Increasing the pressure on the chancellor to change course, Lagarde – who has previously given consistent and public support to the UK's deficit reduction strategy – said the fund had changed its stance as a result of weak economic figures.
She also signalled that an IMF team would conduct a thorough investigation into the health of the UK when it arrives in London to carry out its annual review under the Washington organisation's article IV programme. Lagarde said she "vividly remembered" the chancellor coming to a meeting of European finance ministers and confessing that he was not proud of "carrying the biggest deficit in the room".
The IMF had supported the government's attempt to tackle Britain's record peacetime budget deficit, but the backing had never been unconditional, Lagarde insisted. Despite suggestions from the Treasury that there was a split at the fund between pro- and anti-austerity factions, she gave full support to her chief economist, Olivier Blanchard, who warned Osborne this week that he would be "playing with fire" if he continued on his present course.
Lagarde said: "We have said that should growth abate, should growth be particularly low, then there should be consideration to adjusting by way of slowing the pace. This is nothing new. And this is still the position and one that has been very clearly articulated within the various departments.
"So we very much stand by that. Consideration should be given if growth weakens, and looking at the numbers, without having dwelled and looked under the skin of the British economy, as we will do in a few weeks' time under the article IV, the growth numbers are certainly not particularly good."
By the time IMF officials arrive in Britain next month, the Office for National Statistics will have released growth figures for the first quarter of 2013. These will show whether the UK has slipped into an unprecedented triple-dip recession.
The consensus among City economists is that the UK will next week narrowly avoid a third leg to the recession that began in 2008, but figures this week showing rising unemployment and lower high street spending have underlined the fragility of the economy.
Britain's growth performance has consistently undershot both government and IMF forecasts. This week, the fund's half-yearly World Economic Outlook cut its prediction for UK growth to 0.7% in 2013 and 1.5% in 2014 – a 0.3 percentage point reduction in both years. Osborne said in the budget last month that he expected growth of 0.6% this year, rising to 1.8% in 2014. Output is still around 3% lower than it was when the recession began in the first quarter of 2008.
"What has changed is clearly the quality of the numbers. But I would not, and I don't think anybody in this institution would want to prejudge ahead of the article IV, because that is when we spend three, four weeks discussing, debating, exploring, understanding, trying to go really under the skin of the economy, and we will do that," Lagarde said.
Osborne, who has already eased the pace of deficit reduction, is certain to resist any pressure from the IMF for a politically damaging U-turn.
Lagarde said the past year had seen the emergence of a three-speed global economy – those countries doing well, those on the mend and those that still had quite a distance to travel.
"Now, with strong interconnections, and uneven recovery, that three-speed recovery is not enough and what we need is a full-speed global economy." Lagarde said growth needed to be "solid, sustainable, balanced but also inclusive and very much rooted in green developments."
The IMF managing director said central banks were travelling in "uncharted territories" and would be more comfortable if they could return monetary policy to more normal settings.
Unconventional policies were required, Lagarde added, because interest rates were already low and there was "not much else at the moment to try to kickstart growth in economies, to lower long-term interest rates, and to actually provide that breathing space which the authorities have to use to actually deliver on their fiscal policies as well as their structural reforms".
Lagarde was also forced to answer questions about her own future. Next month she will appear before a French magistrate investigating an arbitration payment made to a former supporter of ex-president Nicolas Sarkozy when she was finance minister in Paris.
Lagarde said there was "nothing new under the sun" and she was ready to be heard in the case, involving businessman Bernard Tapie.
"A date has been set. It will be at the end of May and I'll be very happy to travel for a couple of days to Paris, but it's not going to change my focus, my attention and my enthusiasm for doing the work that I do," she said at a news conference in Washington.
The Treasury was not commenting on Thursday night but is understood to believe the IMF stance, far from being critical, is consistent with its previous support for deficit reduction.
Osborne's deficit strategy leaves him vulnerable
Not since the dark days of 1976 has the arrival in London of the International Monetary Fund been so eagerly awaited. As Christine Lagarde made clear, her officials will pull no punches when they conduct next month's annual health check of the UK.There are, of course, key differences between 2013 and 1976. For a start, the IMF will not be telling the government to adopt austerity but rather to ease up on the pace of deficit reduction.
Secondly, Britain is not going cap in hand to the IMF for a loan. That means, finally, that George Osborne can politely tell Lagarde to take a running jump, which is what he almost certainly will do.
That said, a duffing up by the IMF would still damage Osborne, who has relied on Lagarde to give him cover for his deficit-reduction strategy. The IMF wants countries to reduce their debt levels but believes spending cuts and tax rises cuts in spending and increases in taxes are more than usually potent when interest rates are low, banks weak and many countries are seeking to push through austerity programmes at the same time. Britain provides a textbook example of what happens: growth weakens and deficit reduction falters.
Guardian
