|George Osborne has fallen from grace in the hallowed corridors of the International Monetary Fund fortress on Washington’s Pennsylvania Avenue.
For two years after taking office, the Chancellor could do little wrong in the eyes of the Bretton Woods elite. He was celebrated for getting ahead of the markets on Britain’s broken public finances and, when it became clear the IMF’s own bail-out programmes were so dogmatic that collapsing growth was causing them to backfire, Mr Osborne was cheered again for having the foresight to build flexibility into his original plan.
The love-in is now over. On Tuesday, Olivier Blanchard, the IMF’s chief economist, deliberately singled the UK out for criticism. Asked which eurozone countries should “reconsider the speed of fiscal adjustment”, as he had put it, Mr Blanchard said there were a “few [with] enough fiscal space to go further”, before identifying the UK alone.
Just why he picked on Britain is not immediately obvious. Germany is a much clearer target. Already a bastion of fiscal rectitude, Berlin last month passed measures to balance the budget a year early in 2014. If there is one country with “fiscal space”, it is Germany.
The UK, by comparison, still looks like a fiscal drunk. Three years into austerity, the IMF’s own figures show that – of the advanced economies – only Ireland and Japan will have a larger budget deficit than the UK’s 7pc this year. Gross government debt will hit 100.7pc of GDP in 2016 – placing the UK in the troubled company of Spain, Portugal, Italy and Greece. And the UK will not manage a primary surplus, which excludes the cost of paying interest on the debt, until 2017 – making it an international laggard.
The Chancellor’s austerity drive is not even that demanding, as those on the right of his party constantly remind him. He plans savings amounting to about 1pc of GDP annually for the next three years. That’s bang in line with the IMF’s own recommendation that “the adjustment undertaken in the advanced economies over the last three years, averaging about 1pc of GDP annually, seems about right”.
Moreover, the IMF has placed the UK in its group of 10 advanced countries where “most fiscal vulnerabilities are concentrated”. Germany, the Netherlands and Austria, on the other hand, have “contained” their debts.
The issue for the UK, as ever, is growth. The UK has a woeful track record since the recession and slow growth has meant the public finances have only repaired gradually. The US, by contrast, has cut its larger deficit more quickly by growing far faster.
Mr Blanchard, a Keynesian, believes a little more stimulus would do wonders for both growth and the public finances. “In the face of weak demand it is really time to consider an adjustment to the initial fiscal consolidation plans,” he said. It was the strongest call yet from the IMF for Mr Osborne to switch track and try Plan B.
But there is another reason why the UK was targeted. According to sources in Washington, Britain has been caught in the middle of an ideological battle within the Fund itself.
In the 18 months since David Lipton – a President Barack Obama appointment – took over from John Lispky – a President George Bush appointment – as deputy managing director, the IMF has softened its line. Where Mr Lipsky was fiscally tough, Mr Lipton is fiscally practical. The toll the eurozone bail-out programmes took on growth has also changed the narrative.
The UK has become totemic in the growth versus austerity debate – a live issue in the US, which the IMF stressed still has to devise meaningful structural reforms to address its mounting debts.
For those like Larry Summers, a former President Obama adviser, the UK is a cautionary tale. “Britain has been a powerful and empirical test of the efficacy of determined, resolute austerity. The results so far have not been encouraging to advocates of that strategy,” he said last month.
Mr Summers was not being entirely fair. Mr Osborne abandoned his golden rule on the national debt last year when faced with a choice of “resolute austerity” or letting spending creep up to pay for the likes of unemployment benefits. He has also altered the austerity programme to try to drive growth.
He also wilfully ignored the impact the eurozone crisis has had on demand for UK exports and on confidence among businesses to invest. But, whatever the reason, for the time being it appears Mr Osborne has lost the argument.