IMF warns Osborne his austerity plan is on brink of failure
GEORGE Osborne’s strategy to restore Britain to economic health could be just months from failure, a leading global watchdog has warned.
In a surprise move last night, the International Monetary Fund said the Chancellor should water down his austerity plans if the economy fails to bounce back by early next year.
The IMF has recommended targeted tax cuts and increased spending on infrastructure to kick- start growth, as well as reform of the welfare state and holding back pay in the public sector.
The explosive intervention is the first time the Washington-based authority has set out a timetable for a change of tack, and came as it warned the UK faces ‘significant challenges’.
It is a crushing blow to Mr Osborne who has enjoyed strong support from the IMF and its managing director Christine Lagarde despite the return to recession.
The report prompted a furious debate in Westminster and effectively set up next year’s Budget – possibly in March – as a pivotal moment for the Chancellor as he battles to retain his credibility.
Treasury sources insisted the current plan, including the recent launch of schemes to boost lending and investment in big infrastructure projects, had the backing of the IMF. But Labour’s shadow chancellor Ed Balls said: ‘The IMF is clear that the Government’s economic plan – Plan A – has failed.’
David Cameron has warned that Britain faces years more austerity
‘This is a very serious warning’
and admitted the economic situation was ‘a lot tougher’ than had been predicted when the Coalition took office in 2010.
Since then, the deficit has fallen from a record £159billion under Labour to £128billion last year but plans to cut it further have been hit by the economic downturn. Earlier this week the IMF slashed its forecasts for UK growth to 0.2 per cent in 2012 and 1.4 per cent in 2013 from 0.8 per cent and 2 per cent respectively.
‘Recovery has stalled,’ the Fund said in yesterday’s bleak follow-up report. ‘Post-crisis repair and rebalancing of the UK economy is likely to be more prolonged than initially envisaged. Confidence is weak and uncertainty is high.’
It said the crisis in the eurozone was the ‘overarching risk’ to Britain and added: ‘ The big picture on growth is one of stagnation since late 2010.’ The IMF stopped short of calling for an immediate rewriting of the Budget and said recent efforts to restore growth, such as the £50billion plan to attract investment in infrastructure and support exports, should be given time to bear fruit.
But it warned that a long period of stagnation and ‘alarming’ youth unemployment levels could do lasting damage. Against such a bleak backdrop, the IMF said the pace at which the deficit was cut ‘will need to slow if the recovery fails to take off’ by early 2013.
It said pressing ahead with the current plan ‘may be difficult for the economy to handle if it remains very weak’ and could leave ‘permanent’ scars. There is ‘little evidence’ to suggest there would be a violent backlash on the financial markets, because ‘the UK has the fiscal space to make such adjustments’.
In recent weeks, the authorities have launched a wave of new measures in a desperate bid to drag the country out of recession, including the infrastructure plan.
The Bank of England this month unleashed a third round of quantitative easing – labelled QE3 – taking its money-printing programme up to £375billion from £325billion.
The Bank and the Treasury have also launched an £80billion ‘funding for lending’ scheme designed to get more and cheaper loans and mortgages to businesses and households.
Ajai Chopra, European director at the IMF, said that ‘if growth does not take off and unemployment fails to recede’, the plan to cut the deficit should be scaled back with a focus on tax cuts and infrastructure spending. ‘The Budget would be the natural time to look at the state of the economy and policy responses,’ he said.
A Treasury spokesman said: ‘The IMF have repeated their advice that Britain’s fiscal plans are appropriate.’ But Mr Balls said: ‘This is a very serious warning to the Chancellor that urgent action to boost jobs and growth is needed.
‘How much more damage must be done before George Osborne does the most important U-turn of all?’