The International Monetary Fund (IMF) gives an official slap on the back to George Osborne and his “strong and credible” deficit reduction plan, saying the cuts were essential.
In its annual health check of the UK economy, the IMF declared that Britain was “on the mend”, that unemployment had stabilised and that the health of the financial sector had improved.
“The plan greatly reduces the risk of a costly loss of confidence in pubic finances and supports balanced recovery”, it said.
It was music to the ears of the Chancellor, who immediately hit the airwaves to say that the IMF’s endorsement was proof that his planned £83 billion of cuts was necessary to get the UK economy back on track.
He told Channel 4 News: “This is a vote of confidence in what the new British government has done. It says our deficit reduction plan is strong and credible… I think it gives us the confidence to say we have delivered some stability to the British economy, we’ve got a plan to reduce the deficit and now we’ve got to get on and implement it and not be diverted from our course as some suggest.”
But the IMF also pointed out that the cost-cutting measures – due to be announced in the Spending Review at the end of October – will dampen recovery in the short term, although it said that it would not stop growth altogether as “other sectors of the economy emerge as drivers of recovery, supported by continued monetary stimulus”.
Mr Osborne said it would be “absolutely catastrophic” to change tack now and change the deficit plan as it would risk reverting to a period of “real instability and uncertainty”.
The IMF’s verdict comes as Ed Miliband, the new Labour leader, has said he would use Alistair Darling’s plan to halve the deficit in four years as a “starting point”, with many believing he could introduce the cuts at an even slower pace.
Mr Osborne said that Mr Miliband shouldn’t listen to Mr Darling but should, instead, take heed of the IMF’s critique.
“He needs to have a plan for the biggest single issue that is occupying British political attention at the moment….which is how do you reduce the deficit? So he needs to make his mind up and I would suggest he listens now to the IMF, to the governor of the Bank of England, to British industry, to all those voices saying: ‘Look, Labour created this mess, now they need to work with the Coalition Government in trying to help solve it’.”
The Chancellor said that if the new Labour leader delivered on the deficit reduction plans he’s so far alluded to it would be “flying in the face” of what the IMF was saying.
“I think it would risk a return to the instability we saw under the previous Labour government and we don’t want that. I think Ed Miliband needs to use the opportunity of being the new Labour leader to assess the position that the Labour party have got themselves into on the deficit and realise that when you’re in a hole, you’ve got to stop digging.”
Even though the IMF has endorsed the Coalition’s plan, some economists are still warning that the cuts will go too far, too fast and could risk pushing the UK back into recession.
They point to the case of the Irish economy, which began an austerity drive in 2009. It pulled out of recession at the start of the year, but as the spending cuts took hold, growth slowed dramatically and the economy was pushed back into recession just months later.
Mr Osborne refused to comment specifically on the Irish question, despite three attempts to draw him on the issue, saying only: “I would argue that we are able to look to the future with confidence precisely because the new British government has dealt with the question which was hanging over the British economy, which was can Britain pay its way in the world? We’ve dealt with that with what the IMF has called a strong and credible plan”.