April 18, 2013 8:05 pm

UK and IMF face dust-up on austerity

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Christine Lagarde and George Osborne©Bloomberg

George Osborne is to go toe-to-toe with the International Monetary Fund next month in a battle over the credibility of his Plan A on austerity for the UK, amid signs that incoming Bank of England governor Mark Carney will be a key ally in his fight.

The chancellor is said by aides to be prepared to “aggressively” defend his policies when an IMF team arrives in London to make an annual assessment of the British economy, and is prepared to defy their recommendations if necessary.

Mr Osborne fears that an anti-austerity faction is winning an internal IMF power struggle and that the Fund will hand the opposition Labour party a propaganda tool by formally urging him to relax his fiscal plans.

The chancellor believes that key IMF officials want to criticise his Plan A next month as part of a proxy attack on US Republicans who are forcing through a tight fiscal contraction in Washington.

The IMF, which has previously provided Mr Osborne with political cover for his rolling five-year deficit reduction plan, this week said in its twice-yearly World Economic Outlook that he should consider greater “flexibility” in his deficit reduction plan.

The chancellor believes that “Keynesian” IMF officials including Olivier Blanchard, chief economist, and David Lipton, a former Obama adviser who is now first deputy managing director, are winning the internal argument at the fund.

IMF economists concede they may need to watch out for “poisoned umbrellas” for their so-called “Article IV” mission to London. One aide to Mr Osborne said: “If they recommend we loosen fiscal policy, we won’t do it. We think they are wrong.”

Mr Osborne believes that IMF criticism of his policies is unfair, as Britain’s 1 per cent fiscal contraction this year is in line with the fund’s general recommendations for advanced economies.

The chancellor also argues that this year’s fiscal squeeze in Britain will be less severe than that being implemented in the US, while countries with worse growth prospects than the UK – such as France – are not being urged to relax austerity.

Ed Balls, shadow chancellor, said: “Next week’s growth figures will need to decisively show that a strong and sustained recovery is finally underway or the chancellor will be in real trouble.”

But Mark Carney, who starts work as Bank of England governor in July, signalled that he sided with Mr Osborne in the increasingly bitter dispute with the IMF.

Speaking on the fringes of the IMF and World Bank’s spring meetings in Washington – also attended by Mr Osborne – the Canadian central banker made it clear he did not believe fiscal austerity was a major constraint on the BoE’s ability to stabilise the economy.

Mr Carney said central banks could provide conditions for growth and financial stability but could not deliver long-term growth. “That needs to come from true fiscal adjustment and fundamental structural reforms,” he said

“Central banks take fiscal policy as given and Treasuries take monetary policy as given – that’s the separation,” he added. “I’m not going to wade in [on fiscal policy] positively or negatively ... except in the most extreme circumstances when growth threatens financial stability.”

Downplaying expectations stoked up by Mr Osborne that the pace of economic growth will move up a gear after his arrival, Mr Carney pointed out that the governor’s power “can be overplayed”.

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