Critics mark down Tory stock after warning on hung parliament

Clarke says Britain would require IMF bailout
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Indy Politics

The former Conservative Chancellor Kenneth Clarke was last night accused by City experts and political opponents of "scaremongering" after warning that a hung Parliament would lead to the IMF being called in to bail out Britain's economy.

Mr Clarke's claim that a hung Parliament would trigger a "sterling wobble" leading to an IMF rescue marked a new bitter phase in the election campaign following opinion polls showing that it is increasingly unlikely Conservative leader David Cameron will be able to form a majority government.

His remarks came on the day disappointing unemployment figures were released and warnings from the IMF about Britain's economic growth, unemployment and public finances. These were seized on by ministers as reasons to reject Conservative plans to cut the budget deficit sooner and faster than the Government plans.

However, the IMF pointedly lumped the UK in with Portugal, Ireland, Greece and Spain – the so-called PIGS – in its analysis of government deficits. Without explicitly naming the UK, the IMF said that, "in economies that need to rebuild savings and face relatively greater fiscal changes, there is both a domestic and an international case for putting fiscal policy first".

The headline rate of unemployment rose to just over 2.5 million in the quarter to March, although the number of people claiming Jobseeker's Allowance fell once again, suggesting that the Government may be having some success in pushing people into training or part-time or temporary work. The claimant figures are also more recent than the overall unemployment data. However, economists pointed to the failure to generate new jobs as threatening to produce a "jobless recovery". Employment fell by 90,000 in the period and the unemployment rate has risen to 8 per cent, its highest during the recession. The IMF forecast a further rise later this year, to 8.3 per cent, only falling back to 7.9 per cent next year.

Mr Clarke, who was Chancellor before Gordon Brown took over at the Treasury, said an indecisive result in the election on 6 May would be followed by horse-trading and negotiations. Mr Clarke added: "Bond markets won't wait. Sterling will wobble. We have seen even minor flickers in the opinion polls causing problems with interest rates in the recent past.

"If the British don't decide to put in a government with a working majority, and the markets think that we can't tackle our debt and deficit problems, then the IMF will have to do it for us."

But Professor Charles Goodhart of the London School of Economics described Mr Clarke's remarks as "over the top". "It takes more than a wobble for the IMF to become involved. In 1976, when the IMF did come in, sterling went down in three shuddering steps. I think talk of the IMF coming after a wobble is a little bit over the top but people go over the top in an election," said Professor Goodhart.

Charles Allen, chief executive of EMI Music, said: "Ken Clarke's comments are quite frankly scaremongering. I am very worried that comments like these will damage us domestically and in the international market. He should not use short-term opportunities to cause damage to our economy."

City investment adviser, Desmond O'Driscoll, of Lighthouse Financial Investments, added: "A coalition government has operated in Germany and it hasn't done their economy any harm."

Mr Clarke has a reputation for being outspoken, but he was backed up by George Osborne, the Shadow Chancellor. Mr Osborne said: "It is a statement of fact that the last time – indeed the only time – the IMF came in was when the governing party did not have a workable majority in Parliament, which was in the late 1970s.

"And I don't think people should underestimate the economic consequences of political instability in this country at a time when we are running one of the largest budget deficits in the developed world, when people have questioned our credit rating, and when we can see that there is a very, very serious problem with unemployment and business confidence."

"So that is a very, very serious challenge, and political instability, a hung parliament – people need to be aware of the consequences of that."

Mr Osborne also insisted there had been no Tory discussions about the possibility of a hung Parliament. "I can tell you that no conversations have taken place at Conservative HQ about the consequences of a hung parliament," he said. "We have not sat down and had that conversation because we are very focused on getting a Conservative majority."

Mr Osborne said the Tory campaign was "gaining ground" and that the party was looking at Labour seats it had not previously been targeting, following the post-debate bounce for Nick Clegg's Liberal Democrats. "We believe that the likely outcome of the General Election is a Conservative majority and that is what we are campaigning for," he said. He claimed Gordon Brown was reduced to "pathetically pleading for his job" as the Prime Minister sought to reach out to the Lib Dems. And he predicted Labour's campaign was "not far from a Michael Foot moment" where the party would hold a press conference to confirm that Mr Brown was still leader.

A spokesman for the IMF said: "If a country makes a request, the IMF will consider it. But we do not comment on internal politics of countries."

The IMF has been called in to sort out the indebtedness of Greece and the country has been hit by streets protests by public sector workers at the measures to cut back public spending in an echo of Britain after Denis Healey was forced to call in the IMF in 1976.

There is a widespread expectation that public spending cuts will have to be implemented by whoever wins the general election, and that these will feed through in hundreds of thousands of job losses. The ability of the public sector and in particular the NHS to create extra posts during the worst of the downturn was one reason why the economy escaped an even worse collapse in confidence and output. But that trend seems likely to go sharply into reverse by this time next year.

The IMF says that the economy will grow by 1.3 per cent this year and 2.5 per cent next, the latter a 0.2 per cent cut on its previous projections. In his Budget last month the Chancellor Alistair Darling said he expected the economy to grow by 3.25 per cent next year – markedly more optimistic than the IMF's view and that of many other independent forecasters. If the IMF and others are right, the hole in the public finances will be even more difficult to fill than any of the parties currently argue, as tax revenues will almost certainly be more depressed than presently assumed by the Treasury.

Even so, the IMF's forecast for next year leaves the UK torwards the top of the international growth league among the advanced nations, comparing relatively well with growth in Germany (1.7per cent) and France (1.8 per cent). The IMF said that: "In the United Kingdom, the recovery is projected to continue at a moderate pace; with previous sterling depreciation bolstering net exports even as domestic demand likely remains subdued."

Yvette Cooper, the Work and Pensions Secretary said: "These figures show just how vital it is to keep up support for jobs and the economy this year until the recovery is secure. But the figures make clear we're not out of the woods yet. It would be disastrous for families and for jobs to cut back on public spending and support for the economy right now as the Tories have promised."

Looking across the advanced economies, the IMF warned about a worldwide "jobless recovery". "In advanced economies, unemployment is projected to stay close to 9 per cent through 2011 and then to decline only slowly," it said. "As high unemployment persists in advanced economies, a major concern is that temporary joblessness will turn into long term unemployment".