Gordon Brown on Thursday night urged the leading countries to mount an “urgent” fiscal stimulus as he held talks with top economists in New York, including a Nobel prize winner who is leading calls for radical action to reflate the world economy.
Mr Brown is an admirer of Paul Krugman, this year’s Nobel economics prize winner and New York Times columnist, who in turn has praised the prime minister’s role as a potential “saviour” of the world’s financial system.
Mr Krugman has urged world leaders to avoid “thinking too small” as they plan for a fiscal stimulus.
Calling for a economic stimulus package to dwarf that of the Roosevelt’s New Deal, Mr Krugman on Thursday argued that the US should inject $600bn (€390bn, £480bn) into its economy – at least 4 per cent of gross domestic product. He recommended that Barack Obama’s team calculate how big an intervention the economy requires, “then add 50 per cent”.
“It’s much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little,” he said.
In the unlikely event Mr Brown applied that advice to Britain, it could suggest a fiscal boost of up to £60bn in the pre-Budget report on November 24 – far beyond the expectations of most economists.
Nevertheless Mr Brown, speaking ahead of G20 economic summit in Washington on Saturday, paved the way for a substantial British tax and spending giveaway when he said: “The cost of inaction will be far greater than the cost of any action.”
Speaking en route to the US, Mr Brown said he hoped the world’s leading economies would stage a concerted fiscal boost, minimising the risk that Britain’s own tax-cutting package did not “leak” out of the country by funding higher imports. “It is now becoming accepted around the world that a temporary and affordable fiscal stimulus is necessary,” he said. “This will have most impact if it is co-ordinated internationally.”
Mr Brown has toned down his rhetoric over being a “world leader” in advocating such measures, not least since China last week mounted a $600bn stimulus. The US, Japan and Germany are among other countries to have taken similar action.
The prime minister refuses to say how big Britain’s own stimulus should be. Alistair Darling, chancellor, has said speculation about a £15bn fiscal loosening being needed to have a significant impact on the economy did not come from the Treasury.
Mr Brown will also use the G20 summit to push for an urgent trade world trade deal. He supports moves by Pascal Lamy, head of the World Trade Organisation, to seek a deal before Christmas.
On Friday Mr Brown will meet Luiz Inacio Lula da Silva, Brazil’s president, to forge a common front, but he knows that president-elect Mr Obama’s Democratic party could use its new found dominance in the US to block an accord.
Protectionism – described by Mr Brown as “beggar-thy-neighbour” politics – could become a big difference between London and Mr Obama’s administration.
Mr Obama spoke during his presidential campaign of taking a tough line with US companies that “exported” jobs abroad, a view supported by the dominant Democratic party on Capitol Hill.
“We need to make urgent progress on concluding the world trade talks,” Mr Brown said before attending an “interfaith” summit at the United Nations on Thursday.
“A successful conclusion of the Doha round will inject much-needed confidence into the world economy.”
Downing St officials will meet members of Mr Obama’s transition team, including Madeleine Albright, former US secretary of state, in Washington.