IMF backs Osborne's strategy – but warns tax cuts may be needed

The International Monetary Fund yesterday delivered a powerful endorsement of the Chancellor's strategy to reduce government borrowing – but warned that ministers may need to cut taxes and the Bank of England will have to inject more money into he economy if "major risks materialise". This is the nearest that any international body has come to suggesting a "Plan B" may be needed. The level of unemployment in Britain is, the IMF added, "unacceptable", and it also pointed to inflation and the fragility of the banks as "significant risks".

British economic growth this year, says the IMF, will be 1.5 per cent, down from an estimate of 1.7 per cent in April. For 2012, the IMF is expecting 2.25 per cent to 2.5 per cent growth, a little below the last projection from the UK's own Office for Budget Responsibility.

Nonetheless, the acting managing director of the IMF, John Lipsky declared: "We're pleased the UK is showing global leadership on the economy." The Fund reiterated its view that "strong fiscal consolidation is underway and remains essential." In language that could have been penned by the Treasury's own spin doctors, the IMF's latest assessment of the UK economy concluded that: "The current settings of fiscal and monetary policy remain appropriate in the central scenario. Such a policy mix will support economic rebalancing to a more sustainable equilibrium."

Speaking earlier in the day, the Chancellor said deficit reduction was "the rock" on which stability would be constructed, and agreed that the Government would allow borrowing to rise "cyclically" if the economy weakens: "We have flexibility built into our plan. But what our plan provides is credibility where there was no credibility, stability where there was no stability, confidence that actually the British economy is getting its act together."

In his March Budget, the Chancellor pencilled in a further £46bn of such borrowing over the next few years in the light of higher inflation and lower growth than had been anticipated, and this may yet go higher. The Government says that, whatever the ups and downs of such "cyclical" movements, it remains determined to tackle the "underlying" or "structural" deficit – the part of government borrowing that will not disappear when the economy returns to normal levels of growth.

The IMF verdict will be especially welcome to George Osborne, coming after widespread coverage of the objections to his policy from a group of academic economists who claimed it was "damaging" growth. Answering questions from reporters, Mr Lipsky rejected that term as "loaded". The Fund's team acknowledged that the cuts in public spending and tax hikes would create "headwinds", but that the effort would have a positive impact in restraining inflation and placing the e public finances on a more sustainable long-term footing, thus "bolstering confidence". Mr Lipsky stressed that the UK's public spending remained very high by historical standards.

Nonetheless the IMF did, for the first time, suggest an alternative policy if "the economy experiences a prolonged period of weak growth and high unemployment". Temporary tax cuts, they argue, should be "targeted to investment, low-income households, or job creation".

There was little in the IMF's report to support the argument of Shadow Chancellor Ed Balls that the Government has been cutting public spending too hard and too fast, and even if the economy stumbles, the IMF prefers tax cuts to postponing public expenditure cuts, as Mr Balls has advocated.

Mr Balls has made much in recent weeks of the slow pace of recovery and the economy has flatlined since last autumn. Disappointing shop sales and car registration figures yesterday confirmed the gloomy picture on consumer spending. Yet the Fund concludes: "The weakness in economic growth and rise in inflation over the last several months was unexpected. This raises the question whether it is time to adjust macroeconomic policies. The answer is no as the deviations are largely temporary." Mr Lipsky also expressed confidence about private sector job growth and business investment.

Mr Balls commented: "Nobody will be surprised that the IMF has decided to reaffirm its backing for the Government's policies at this very sensitive time. But the Chancellor should not take too much comfort from the report. The IMF has warned that there are significant risks to inflation, growth and unemployment."

Safe hands at the IMF tiller

* London's hotel chambermaids, female members of the IMF staff and indeed the Chancellor of the Exchequer's policies all have little to fear from John Lipsky, the Fund's 64-year-old acting head, writes Sean O'Grady.

Apart from his luxuriant trademark moustache, which gives him the appearance of an Edwardian male model, the American Mr Lipsky is an IMF "lifer", and the very model of a grey international monetary statesman. In the press conference yesterday he successfully neutered the best efforts of Fleet Street's finest to wrongfoot him and was much too clever for them, veteran as he is of countless bureaucratic skirmishes.

The Fund, and Fund-watchers, will miss Mr Lipsky. He retires this autumn, having stood in for Dominique Strauss-Kahn since his resignation on 18 May. The French Finance minister, Christine Lagarde, is favourite to succeed Mr Lipsky.

News
The surrealist comedian at the Q Awards in 2010
people
News
Russell Brand arriving for the book launch in East London
peopleRussell Brand cancels his book launch debate due to concerns about the make-up of the panel
Sport
Christiano Ronaldo enjoys his opening goal
champions leagueLiverpool 0 Real Madrid 3: Ronaldo and Benzema run Reds ragged to avenge thrashing from their last visit to Anfield
Arts and Entertainment
Awesome foursome: Sam Smith shows off his awards
music22-year-old confirms he is 2014’s breakout British music success
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
Six of the 76 Goats' cheese samples contained a significant amount of sheep's cheese
food + drink
Arts and Entertainment
Contestants during this summer's Celebrity Big Brother grand finale
tvBroadcaster attempts to change its image following sale to American media group
Extras
indybest
News
Wilko Johnson is currently on his farewell tour
people
Arts and Entertainment
Sarah Dales attempts to sell British Breeze in the luxury scent task
tvReview: 'Apprentice' candidate on the verge of tears as they were ejected from the boardroom
News
Call me Superman: one of many unusual names chosen by Chinese students
newsChinese state TV offers advice for citizens picking a Western moniker
Voices
New look: Zellweger at Elle's Women in Hollywood awards on Monday
voicesRenée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity, says Amanda Hess
Arts and Entertainment
Julianne Moore and Ellen Page are starring together in civil rights drama Freeheld
film
Voices
'Irritatingly Disneyfied': fashion vlogger Zoella
voicesVicky Chandler: Zoella shows us that feminism can come in all forms
Life and Style
health
Arts and Entertainment
Pink Floyd on stage at Live 8 in 2005. From left to right: David Gilmour, Roger Waters, Nick Mason and Rick Wright
music New album The Endless River set to overtake boyband for most pre-ordered of all-time
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Solutions Architect - Permanent - London - £70k DOE

£60000 - £70000 Per Annum Excellent benefits: Clearwater People Solutions Ltd:...

General Cover Teacher

£110 - £130 per day: Randstad Education Reading: Great opportunities for Cover...

Maths Teacher

£110 - £130 per day: Randstad Education Reading: QTS Maths Teachers needed for...

Maths Teacher

£110 - £130 per day: Randstad Education Reading: QTS Maths Teachers needed for...

Day In a Page

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
West Indies tour of India: Hurricane set to sweep Windies into the shadows

Hurricane set to sweep Windies into the shadows

Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?