The chief economist of the International Monetary Fund today said that the George Osborne should slow the pace of his planned spending cuts in his March Budget – in effect adopting an economic Plan B.
Olivier Blanchard, in an interview on the Today programme this morning, said that the continued weakness of the UK economy merited a change of fiscal course.
“Slower fiscal consolidation in some form may well be appropriate” he said.
Last May, the IMF, in its annual review of UK, recommended that the Coalition should ease up on its austerity measures to support growth if the economy continued to underperform. The Office for National Statistics is widely expected to report on Friday that the UK economy returned to contraction in the final three months of 2012, raising the prospect of a triple dip recession.
“Out early advice is still there” said Mr Blanchard. “If things look bad at the beginning of 2013, which they do, there should be a reassessment of fiscal policy”.
The recommendation will come as a blow to the Chancellor because he has always placed great emphasis on the IMF's support for his austerity policies.
Mr Blanchard added that March’s Budget would be an ideal time for the Chancellor – who has long resisted any deviation from the deficit reduction schedule he laid out in June 2010 – to enact a change in policy.
“You have a Budget coming in March. We think this is a good time to take stock and see whether some adjustment could be made” he said. “Budget time seems like the right time to do these things”.
Last year Mr Blanchard conducted some research which analysed why the economic growth in many countries in recent years had underperformed the Fund’s forecasts. He concluded that the impact of the spending cuts on growth had been two to three times greater than the IMF’s standard forecasting model assumed.
Yesterday the IMF cut its growth forecasts for the UK for 2013 from 1.1 per cent to 1 per cent and for 2014 from 2.2 per cent to 1.9 per cent. These were the biggest downgrades for any advanced economy other than Japan.
Last May the IMF recommended that the Coalition should consider a temporary cut in VAT and more state infrastructure spending if the economy failed to respond to further monetary stimulus.
George Osborne, asked about Mr Blanchard’s call for a Plan B at the World Economic Forum in Davos, said that he would stick with his existing spending cutting schedule.
“I don’t think it’s right to abandon a credible deficit reduction plan” he said. “That credibility is very hard won and very easily lost. It would be a huge mistake to put that at risk”.
Treasury sources suggested that Mr Blanchard did not speak for the IMF as an institution.
“It’s no surprise coming from Blanchard” said one senior source. “Everyone knows there’s a debate in the IMF about this and he’s at one end of it”.
The source also pointed out that the IMF called for the policy to be reappraised at the beginning of 2013, but there has been no hard economic data yet showing how this economy has been performing this year.
The Chancellor received a pre-release today of the official figures showing how the economy performed in the final quarter of 2013. Asked in Davos about how he would describe the present condition of the UK economy Mr Osborne said: “We are walking a difficult road, but we are heading in the right direction”.
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