Osborne backs austerity
Britain’s biggest budget squeeze since World War II leaves its economy stronger
london — UK Chancellor of the Exchequer George Osborne renewed his commitment to fiscal austerity by rebutting warnings that governments must spend more if their economies are to avoid a period of “secular stagnation.”
Re-engaging in an ideological battle with former US Treasury Secretary Lawrence Summers and the International Monetary Fund (IMF), Osborne used a speech on Saturday in Washington to say Britain’s biggest budget squeeze since World War II left its economy stronger not weaker. Summers lobbied against austerity and now argues rich nations risk a persistent lack of demand that can’t be fixed by low interest rates alone, and the IMF has previously criticised Osborne for pushing austerity too far.
“The pessimists are on the march again with their predictions of stagnation and falling living standards,” Osborne said in a speech to the American Enterprise Institute during the spring meetings of the IMF and World Bank, and released by the Treasury in London. “We, the optimists, can prove them wrong again. Our two nations’ best days lie ahead.”
Osborne is declaring victory for his austerity push after the IMF raised its forecasts for UK economic growth this week for a second time this year. Chief economist Olivier Blanchard said a year ago the UK’s budget-cutters risked “playing with fire.”
The Washington-based lender now forecasts the economy will expand 2.9 per cent in 2014 and 2.5 per cent next year. It nevertheless said that although growth has been “stronger than anticipated” the recovery has been unbalanced.
Rejecting Summers’s advice that governments should spend more and that easy monetary policy can’t be relied upon, Osborne said such a case is “increasingly difficult to sustain” and that it “is precisely the wrong prescription for our economies.”
“My outlook is fundamentally optimistic and I have set out a very different prescription: fiscal responsibility, effective monetary policy, far-reaching and ambitious supplyside reforms,” Osborne said.
Osborne pointed to strengths he sees in the UK, noting job creation has increased faster than forecast and investment spending is rising at four times the pace of the US.
“The evidence increasingly shows that monetary policy, broadly defined and effectively deployed, can work” so long as banks are well capitalized and fiscal policy is credible, he said.
“In the UK, we have those conditions in place,” he said. “Fiscal consolidation and economic recov- ery go together.” Osborne, whose Conservative Party has come under attack from the Labour opposition amid an unprecedented squeeze on household incomes, said growth is the best way to boost living standards. “The long-term link between economic growth and living standards has not been broken,” he said. “When the economy
My outlook is fundamentally optimistic
George Osborne
shrinks people get poorer, and the only way to ensure people are better off is for the economy to grow.”
He cited Treasury research showing there’s no evidence pay had become detached from gross domestic product growth.
Rather than increasing their debts, Osborne said governments should revamp economies by cutting budget deficits, reducing business taxes, supporting infrastructure investment and encouraging the shale revolution.
It is not the first time Osborne has taken on Summers, who now teaches at Harvard University. On a January panel at the World Economic Forum in Davos, Switzerland, the two sparred over how much governments can spur investment and the virtues of austerity.