IMF calls for rate cuts to dig UK out of recession


Head of the International Monetary Fund Christine Lagarde has called for Britain to make tax and interest rate cuts to 'bolster demand before low growth becomes entrenched'. 

The IMF said swift action was needed to prepare an emergency package of tax cuts, spending increases, and electronic money creation from the Bank of England to lift Britain out of its double-dip recession.

Speaking with Osborne at a news conference in London, Christine Lagarde said: "Growth is too slow and unemployment, including youth unemployment, is too high. Policies to bolster demand before low growth becomes entrenched are need.  If the economy turns out to be significantly weaker than forecast, fiscal easing should be considered."

Labour seized on the findings of the IMF's latest health check on the UK as evidence that two years of government austerity had killed off Britain's recovery from the deepest recession since the second world war. 

They are urging the chancellor to adopt a five-point recovery plan that includes temporary tax cuts.  Shadow chancellor Ed Balls said: "If we fail to act, and we see years of slow growth and high unemployment being entrenched, Britain will pay a heavy long-term price."

However, the IMF and Lagarde were careful to praise Osborne's approach to cutting the UK's budget deficit. The report said that deficit reduction was "essential" in the medium term and paid tribute to the "substantial progress" towards a sustainable budget delivered by the government's austerity programme. "When I think back to May 2010, when the UK deficit was at 11%, and I try to imagine what the situation would be like today if no such fiscal consolidation programme had been decided, I shiver," said Lagarde.

Lagarde also praised Osborne for relenting on some cuts in his autumn statement last November, but said this fiscal easing may no longer be enough.  The IMF said there was scope for the government to boost growth through higher spending on infrastructure projects, which would increase employment and demand within the economy.

The IMF and Paris based think tank OECD also warned the UK to prepare for an escalation of the eurozone crisis that would deliver a "substantial contractionary shock" to the economy.  Reports from both the OECE and the IMF identify uncertainty over the future of the euro as the main danger to the UK’s recovery warning: "Risks are large and tilted clearly to the downside."

The monetary policy committee's (MPC) £325bn QE scheme received praise from Legarde, but she urged it to consider further base rate cuts, more QE and a wider range of credit schemes to boost direct lending to stimulate growth.  She acknowledged the risks involved but said "These risks need to be weighted against the risk of lost years of growth. To this end, further monetary easing is required."

Osborne said both reports showed that the government was on the right track. "Britain has got to deal with its debts and the government's fiscal policy is the appropriate one and an essential part of our road to recovery " he said.

The Treasury is developing schemes to use its historically low borrowing costs to support a wide range of commercial projects, mainly in infrastructure.

Government spending on infrastructure was down by a quarter in the last year and the Treasury is under pressure to devise plans that will increase spending without adding to the UK's debts. Osborne said schemes to support infrastructure projects and lending to small businesses would be ready over the next few months.


  • Date posted:
    30/05/2012
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