In terms that the Chancellor himself might have found immodest, the International Monetary Fund yesterday offered the Coalition Government an extraordinarily warm endorsement of its economic policy, implicitly rubbishing Labour claims that the Treasury's policies risk a "double-dip" recession.
The IMF said that the UK's economic recovery was "under way", praised the Government's "essential", "strong and credible" plan to reduce the deficit, and concluded that "fiscal tightening will dampen short-term growth but not stop it as other sectors of the economy emerge as drivers of recovery, supported by continued monetary stimulus".
The deficit reduction plan, the Fund states in its annual review of the British economy, "greatly reduces the risk of a costly loss of confidence in public finances and supports a balanced recovery."
The IMF marginally downgraded its forecast for UK growth for next year, from 2.1 to 2 per cent, putting expansion in the medium term at 2.5 per cent, with the possibility that it could be much stronger. Inflation, says the Fund, will return to below the official target of 2 per cent by early 2012, a touch later than the Bank of England forecasts. Stress tests confirm that the British banks are in "relatively good health".
However, the IMF did foresee some dangers: "Downside risks are also sizeable, given the continued fragility of confidence, still-strained balance sheets among households and banks, signs of renewed housing market weakness, and the possibility that headwinds from fiscal consolidation could be more powerful than expected". Any or all those could "trigger another extended contraction in output".
In such circumstances, rather than the Government altering its fiscal plans, the Fund suggests that the Bank of England should resume its programme of "quantitative easing", the direct injection of money into the economy.
Last night the Bank's Deputy Governor, Charlie Bean, told Channel 4 News: "The action that we're taking now is designed to get the economy back to a reasonable level of activity as soon as we can. The faster we can achieve that, the sooner interest rates will get back to more normal levels."
Mr Bean added: "I think it needs to be said that savers shouldn't necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit."
Overall, the IMF verdict remains deeply favourable to the Government: "The UK economy is on the mend. Economic recovery is under way, unemployment has stabilised, and financial sector health has improved."
Mr Osborne welcomed the report as "a very, very strong endorsement". The former chancellor Alistair Darling told the Labour conference that the approach the Coalition has "chosen, and it is a choice, is a huge gamble with growth and jobs. Our approach is measured and balanced".
The IMF also offered political "cover" for Mr Osborne to continue his assault on public sector pensions and greater means-testing for welfare benefits. The IMF advised ministers to give "achieving savings in benefits and transfers through better targeting .... Potential measures in this area also include bringing forward the statutory retirement age for state pensions and gradually aligning the generosity of public sector pensions with those for their counterparts in the private sector."
The UK's major banks ought to restrain bonus and dividend payments to help bolster their capital strength, the Fund added.Reuse content