David Cameron won international backing for the coalition Government's deep public spending cuts last night, as the heads of the world's 20 leading economies urged nations with big deficits to tackle them more quickly.
The G20 leaders, meeting in Canada, averted a rift between America and Europe by agreeing that countries would reduce their deficits at different paces, according to national circumstances. This gives the US the green light to carry on spending.
The Obama administration is worried that the stampede to cut state spending in Europe could choke off a global recovery. But the centre of gravity inside the G20 has shifted towards cuts after the sovereign debt crisis in Greece spooked the financial markets.
Last night's final communiqué said: "Those countries with serious fiscal challenges need to accelerate the pace of consolidation... There is also a risk that the failure to implement consolidation would undermine confidence and hamper growth."
However, the statement also warned that "synchronsised fiscal adjustment across several major economies could adversely impact the recovery". "We are committed to taking concerted actions to sustain the recovery, create jobs and to achieve stronger, more sustainable and more balanced growth," the G20 document said. "These [actions] will be differentiated and tailored to national circumstances."
Although the flexibility in the statement appeared to keep everyone happy, the wording was trumpeted by Mr Cameron and the Chancellor, George Osborne, as a vindication of their strategy. They also welcomed guidelines agreed by the G20 saying that countries should halve their deficits by 2013. The emergency Budget announced by Mr Osborne last week said Britain's deficit, the largest in the G20, would fall from 11 to 5.5 per cent gross domestic product by 2012-13.
Attending his first global summit, the Prime Minister won plaudits from other leaders for taking decisive action to reduce Britain's £150bn deficit. British officials said President Obama singled out Mr Cameron for praise during yesterday's session.
Asked by The Independent whether Britain had isolated Mr Obama on the issue of deficit reduction versus stimulus spending, Mr Osborne, smiling broadly, replied: "Look at the communiqué. It's a good one."
He added: "We are all working together on the same problem of how we can ensure sustainable recovery, but each country has a different contribution to make."
Mr Cameron said Britain received "great backing" at the summit and insisted its cuts strategy was "not an alternative to growth" but "part of a global growth package". He denied that the G20 statement had been drafted to allow all leaders to claim victory and insited it was a "mistake" to portray the meeting as being about differences between America and Europe.
The German Chancellor, Angela Merkel, whose deficit cuts plans upset the Obama adminstration, said the G20's call for deficits to be halved by 2013 was "more than I expected".
Mr Obama played down differences with Europe but warned: "We must recognise that our fiscal health tomorrow will rest in no small measure on our ability to create jobs and growth today."
If he was losing the G20's support for the need to stay the course on stimulus spending, the same may be true in Washington, where Democratic Party leaders said they were shelving the White House's request for extra spending to job creation; thus the spending-versus-austerity calculus is not clear-cut for Mr Obama at home either.
While unemployment – hovering at just under 10 per cent – remains the No 1 issue for voters in America's mid-term elections this year, almost as powerful is the movement to shrink government and limit public spending.
The G20 leaders backed the US and Britain in a tussle with France and Germany over how banks should withstand another financial crisis without resorting to government support. The summit agreed that the amount of capital held by banks should be "significantly higher" and its quality "significantly improved". It said such a move should be phased in so that banks did not stall recovery by hoarding capital and not lending. The G20 will take a final decision at its next summit in Seoul in November.
The summit left it up to individual countries whether to levy a tax on banks to recoup the cost of bailouts. The US and Europe pushed for such a tax, while countries including Canada objected on the grounds that their banks should not be punished because they did not cause the financial crisis.
G20 leaders finally conceded that a stalled deal on world trade would not be completed by the latest target date of the end of this year. They agreed not to erect new barriers to trade in goods and services for another three years.
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