Cameron defends deficit plans as IMF chief gives qualified support

Christine Lagarde says Britain must be ready to change tack as Downing Street rules out copying Obama’s Jobs Act David Cameron and George Osborne were forced to defend their fiscal deficit reduction plan after the head of the IMF said Britain may have to change tack if the economy struggles to recover. As Labour claimed that Christine Lagarde’s warning showed the danger of cutting too quickly, Downing Street insisted there would be no change because Britain still faced “fiscal risks”. The row broke out after Lagarde, the managing director of the IMF, offered a qualified endorsement of the plan to eliminate Britain’s structural deficit by 2015. At a joint event with the chancellor at Chatham House, she said: “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 a prolonged period of weak growth and high unemployment.” Osborne made it clear there would be no change. “Britain will stick to the deficit plan we have set out. It is the rock of stability upon which our recovery is built. It has delivered record low interest rates. “Abandoning that plan would put those interest rates at risk. For nothing would be more damaging for Britain at this fragile moment for the world’s economy than an increase in mortgage rates for families and an increase in the cost of borrowing for businesses.” But Tim Geithner, the US treasury secretary who was joined by Lagarde and Osborne at a meeting of G7 finance ministers in Marseille yesterday, also appeared to question Britain’s focus on deficit reduction and monetary, rather than fiscal, policy. In an article for the FT, Geithner warned of “unwarranted disaffection with the efficacy of the traditional fiscal tools of tax cuts and investment to encourage growth”. He added that governments with high deficits were right to cut but “can at least slow the pace of consolidation”. Ed Balls, the shadow chancellor, said that Lagarde’s warning should be heeded by Britain. “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.”Amid the criticisms, Cameron issued a ringing endorsement of the chancellor’s plans. The prime minister told the BBC: “We have one of the biggest budget deficits in the world. That’s why the OECD and Christine Lagarde and others have said that Britain is quite a special case. We have got to deal with that. The reason we have interest rates that are as low almost as Germany’s, but our national deficit is actually bigger than Greece’s, is because we have a plan to deal with our debt. We mustn’t give up on that.” Downing Street had earlier made clear its determination to stick to Britain’s deficit reduction plan when it flatly ruled out following the example of Barack Obama. The president attempted to boost the US economy by outlining a $450bn (£283bn) jobs plan to Congress on Thursday night . Cameron’s spokesman distanced No 10 from the White House by saying that the US was facing a greater challenge than Britain. “Of course they have had particularly bad news over a sustained period with their labour market. He is seeking to address that.” The spokesman said: “Every country needs to have a response which is appropriate to its particular circumstances. The US is in a slightly different position because it has a reserve currency. Therefore it doesn’t face some of the same constraints other countries might face. It gives them more flexibility to do that.” The US Jobs Act would also not add to the US deficit, the spokesman added. “It is true, if you look at what Obama said, that he has been very clear that the American Jobs Act will not add to the deficit and that [in] the agreement passed in July, which cut government spending, he will be looking for more measures to cover the full cost of the Jobs Act.” The spokesman said Britain had to act with caution because it faced “fiscal risks”. He said: “Those countries which have particular fiscal risks – and remember we have the biggest deficit of any country pretty much – those countries need to take action to address their deficits and to consolidate.” Lagarde praised Obama’s plan. “We welcome the proposals announced by President Obama last night, which focus on supporting growth and job creation in the short term,” she said. But Lagarde added that she looked forward to hearing about Obama’s plans to cut the country’s debt. The IMF director added: “As the president also emphasised, it remains critical for the United States to clarify its medium-term plan to put public debt on a more sustainable path, and we look forward to the proposed consolidation plan to be announced in the coming days.” Treasury sources said Lagarde’s suggestions for future action were already government policy. These are: allowing the automatic fiscal stabilisers, which allow welfare spending to rise as tax receipts fall in a downturn, to kick in; and emphasising monetary policy. David Cameron IMF Economics Global economy Christine Lagarde George Osborne Nicholas Watt guardian.co.uk

Posted by on September 9, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.