If economic growth continues to shrink – or even just to continue flatlining – governments do have scope to reconsider austerity, International Monetary Fund chief economist Olivier Blanchard warned this week.
His remarks – in the context of the downbeat forecast for the global economy – echoed an earlier, prescient, warning from IMF chief executive Christine Lagarde last autumn and foreshadowed the worse than expected economic figures for the United Kingdom.
The IMF, in its downward revision of UK and global growth forecasts, advised that those countries not cut off from the markets by unaffordable borrowing costs must avoid further discretionary austerity.
“Decreasing debt is a marathon, not a sprint. Going too fast will kill growth”, said Mr Blanchard less than 24 hours before it was revealed British growth shrank even more than had been expected at the end of last year and the country is at risk of re-entering recession.
One of Chancellor George Osborne’s stoutest defenders, advertising entrepreneur Sir Martin Sorrell, speaking as the World Economic Forum kicked of in Davos, Switzerland, expressed confidence that a so-called “double-dip” recession could be avoided – but only if the Government starts to promote a credible growth strategy.
Public spending cuts, while necessary, are not, by themselves enough, he said. People have to have some cause to look upward and believe there is a pay-off for the pain, he said.
Prime Minister David Cameron – more than 18 months into government – sought to explain Britain’s most recent economic contraction as a result of both the debt overhang from the last Labour Government and the eurozone crisis.
Labour leader Ed Miliband, in his weekly exchange with Mr Cameron, while missing an opportunity to cite Mr Blanchard’s advice – that if growth is dismal a government can go about its discretionary budgetary cuts more slowly – used the opportunity to deride Mr Cameron’s insistence that overall the UK economy had actually grown in 2011, albeit very modestly.
Not only had growth contracted and unemployment risen, but the very deficit his austerity plan was designed to eliminate would instead increase by £158 billion by the end of the current parliament, he said.
Shadow Chancellor Ed Balls, who said Britain’s stagnant economy had gone into reverse, called for an immediate cut in VAT, National Insurance for small firms, and a repeat of the tax on bankers’ bonuses in the forthcoming Budget.
