IMF head backs cuts as right for UK recovery

chancellor George Osborne yesterday defended his hardline approach to spending cuts as the right way ahead for the UK economy, despite the slump in growth.

The coalition government’s approach was backed by the head of the International Monetary Fund (IMF), Christine Lagarde, although she warned that policymakers must be ready to change course if conditions worsen any further.

Her warning, ahead of a meeting of the G7 leading economies in Marseilles, came as sharp falls in banking shares led US and European stock markets to dip over concerns about the strength of the world economy. The Dow Jones index dropped 2.69 per cent, which in turned pulled European shares lower. German shares fell 4 per cent, while UK shares declined 2.4 per cent.

Ms Lagarde urged “bold action” on the global economy, saying: “The key message I wish to convey today is that countries must act now – and act boldly –to steer their economies through this dangerous new phase of the recovery.”

The coalition’s core policy, to drive down the UK’s annual deficit of about £150 billion, the gap between taxes raised and government spending, through a programme of spending cuts, has been criticised by opposition politicians, including the SNP, as going too far, too fast.

But Mr Osborne said yesterday: “The UK’s strong fiscal consolidation is essential to restore debt sustainability given the UK’s very large structural deficit and large financial sector relative to GDP. That is why Christine Lagarde says our policy stance remains appropriate.

“But I agree with her that policymakers must remain alert to risks.”

Mr Osborne went on: “We will stick to the deficit reduction plan we have set out. It is the rock of stability on which our economy is built.”

The Chancellor was speaking alongside Ms Lagarde in London, before travelling to France for talks with G7 finance ministers.

Ms Lagarde said the risks from stagnating growth were increasing and had to be weighed against risks of sovereign debt, adding that policymakers should be “nimble”.

“As we all know, the policy stance [in the UK] was premised on a greater role for private sector demand, especially a robust recovery in exports, to take over as the public sector retrenched,” she said.

“But since the summer, the outlook has been more subdued, including in particular Europe and the US, which are the two main trading partners of the UK.

“So the risks and troubles are rising. The policy stance remains appropriate. But the heightened risk means a heightened readiness to respond, particularly if it looks like the economy is headed for weak growth and high unemployment.”

She said there was room for action on monetary policy, indicating support for another round of quantitative easing – effectively printing money – by the Bank of England.

Ms Lagarde also insisted governments should not raise interest rates to ease the squeeze on consumers. The risk of recession currently outweighed the “risk of inflation”, she said.

The United States pressed Europe’s strongest economies to give “unequivocal” financial support to weaker eurozone states to overcome a debt crisis that threatens the world economy. “It is completely within the capacity of the stronger members of the euro area to absorb these costs,” US Treasury secretary Timothy Geithner said in Marseilles.

Japan said it will voice its concern on the eurozone debt crisis and seek support for its right to unilateral action over safe-haven buying pushing up the yen. Bank of Japan governor Masaaki Shirakawa said it was vital that G7 finance chiefs came up with a “firm stance” to stabilise the world economy.

Shadow chancellor Ed Balls said: “Christine Lagarde is right to repeat her warning that cutting too quickly will hurt the recovery and jobs, and that there is scope for reducing deficits more steadily to support economic growth.

“This is clearly a message aimed squarely at America, the eurozone and Britain, too.”

Scottish Government finance secretary John Swinney has called for the coalition to change its economic course.

“Growth forecasts for the UK economy as a whole have been downgraded throughout the past year,” a Scottish Government spokesman said.

“The Scottish Government is pressing the UK government to act now and introduce a Plan B to drive recovery. This should focus on boosting capital investment, access to finance and measures to boost economic confidence and income security.”