|A row between George Osborne and the International Monetary Fund over Britain’s economic strategy has escalated after the fund’s deputy managing director joined those urging the Chancellor to consider slowing down his austerity plans.
Mr Osborne had tried to dismiss calls by the IMF’s chief economist Olivier Blanchard last week for the UK to ease the £130bn programme of spending cuts and tax rises as “just one voice”, claiming: “The IMF’s position has not changed.”
But David Lipton, the IMF’s second-in-charge, has waded into the battle alongside Mr Blanchard. “The UK economy has turned out to be somewhat weaker than had been foreseen, so our view is that the pace of consolidation ought to be reconsidered, and we’ll want to come and have some discussions about that,” he told Sky News.
Mr Lipton’s intervention will heap more pressure on Mr Osborne to change course after a difficult week in which a second credit rating agency stripped the UK of its AAA status and the Chancellor’s favourite economists had their work called into question.
Mr Lipton is a key figure because he is scheduled to unveil the IMF’s latest detailed analysis of the UK and present its policy recommendations in London next month. Mr Blanchard and Mr Lipton have both signalled that the Fund will tell Mr Osborne to ease his spending cuts to rekindle growth at the event.
“A lot of progress has been made [on reducing the budget deficit],” Mr Lipton said. “But the question now is whether the pace is right or too ambitious given the weakness of the economy.”
Mr Blanchard has claimed the Chancellor is “playing with fire” by pressing ahead with his plans in the face of a stalling recovery. However, Fitch, the ratings agency, argued that the UK had no “fiscal space to absorb further adverse economic and financial shocks” in its decision to cut Britain from AAA to AA+.
Treasury sources believe Britain has been caught in the middle of an ideological tussle within the IMF, with Mr Lipton and Mr Blanchard leading the charge for more spending against the fiscal hawks.
They claim that the battle is being fought by proxy in the IMF to strengthen President Barack Obama in his own battle over deficit reduction against the Republicans. Mr Lipton was nominated for the IMF role by President Obama.
IMF insiders have dismissed the theory, claiming the internal debate is just part of a regular, healthy argument.
However, advocates of more spending were given a fillip this week by new research that showed analysis by Harvard economists Ken Rogoff and Carmen Reinhart was flawed. They had claimed that countries with debts of more than 90pc of GDP grew more slowly.
Mr Osborne has cited their work to defend his austerity programme. Most economists pointed out that the main thrust of their work, that high debt is damaging, remained relevant.