Business Secretary Vince Cable tells Channel 4 News global financial instability is making the world a “very dangerous place at the moment”.
The Business Secretary spoke to Channel 4 News after the International Monetary Fund warned that economic growth in Britain would be lower than expected this year.
The IMF warning came after Italy’s credit rating was downgraded earlier today, adding to the pressure in the eurozone.
Mr Cable told Channel 4 News there are risks associated with fiscal austerity but they pale in comparison to the dangers that could be brought on without it.
“There are dangers in both directions, that is a risk, we’ve confronted it, we think it’s a lesser risk than gambling with our fiscal rules and undermining confidence, precipitating the kind of problem that’s happened with other countries, inevitably in southern europe.
“When you lose the confidence of the markets your interest rates rise dramatically you have more to pay on government debt, we dont want to take that risk, we have committed ourselves to working down the structural deficit,” Mr Cable said.
He said that there was flexibility built into the government’s economic strategy, but stressed that now was not the time to change course or take risks as the markets remained “febrile”.
“There is flexibility built into our policies, so called automatic stabilisers, but we do have to be very careful, we are dealing with very febrile markets,
“Britain has so far had the benefit of the doubt, which is why our long-term interest rates, our bond yields, are very low, we want to keep it that way, we don’t want to be on the wrong side of the argument,” Mr Cable said.
He added: “We can’t take risks with undermining the fiscal disciplines we’ve built in. There are other ways in which we can stimulate the economy, there is scope in monetary policy – obviously the Bank of England’s decision – and there are other ways we can sustain demand.”
But he conceded “the world is a very dangerous place at the moment.”
The Business Secretary, speaking at the Liberal Democrat conference in Birmingham, said that the focus now would be on building up the elements in the government’s economic strategy which would encourage growth.
His comments were echoed by CBI Director-General John Cridland, who told Channel 4 News it was time for “plan A plus”.
He said: “Business confidence around the world has crumbled because of the instability in the US and particularly Europe and what bothers me most is the lack of confidence in the euro because that weakens Germany, and Germany is our biggest export market. So that weakens our ability to achieve an export-led manufacturing recovery from recession.
“So what can we do? Well the government has to stick to plan A – deficit reduction – because without that the international money markets would be chasing the UK like they are with some countries in Europe. So we at the CBI passionately believe in that – but it can be plan A plus, which means finding ways to stimulate growth.”
He said infrastructure spending was key.
“So super fast broadband, transport infrastructure and more investment in energy security – creating low carbon jobs as Chris Huhne was talking about earlier. All these three things would make a material difference to uk growth.”