Chancellor George Osborne received a boost from the International Monetary Fund (IMF) this week. The IMF trimmed its UK growth forecast for the third time in a year. But it reckons the soft patch is temporary and there is no need “to adjust macroeconomic policies… strong fiscal consolidation is underway and remains essential”. The IMF thus unequivocally backed his deficit-reduction plan.
The clamour for a change of course, or a ‘plan B’, has grown as recent data has deteriorated. An index tracking manufacturing activity dropped sharply last week while its service sector equivalent slid too. Like-for-like retail sales are 2.1% down on a year ago, said the British Retail Consortium.
What the commentators said
Given the soft data it’s no wonder people fear that austerity is undermining the economy. But “those who argue for boosting spending are ignoring the greater risks” Osborne would have run had he not opted to tackle our ballooning debt load decisively, said The Times. Last June there was a real risk of Britain losing its credit rating and gilt yields soaring as the markets ditched our debt. That would have driven up long-term borrowing costs. Osborne’s ‘plan A’ “averted a worse crisis”.
It would be a similar story if we changed course barely a year into “efforts to restore some sanity to the public finances”, said Russell Lynch in the Evening Standard. After all, we still have to tap bond markets to fill a budget deficit of 8% of GDP this year. Thanks to Osborne’s ‘plan A’, the government’s ten-year borrowing cost is just 0.2% above Germany’s: the markets are confident that we are getting our debt under control. A U-turn now would cause a massive loss of credibility and a “hefty gilt sell-off”, sending borrowing costs up across the public and private sectors.
There is also more flexibility built into the chancellor’s plan than many realise, said Jeremy Warner on Telegraph.co.uk. He plans to eliminate the deficit in four years, but the parliament will last five. So there’s a year’s room for manoeuvre. In short, plan A is the best we’ve got. Combined with the Bank of England keeping short-term interest rates at rock-bottom levels, said Ian Campbell on Breakingviews, it forms “the right policy mix” for “a slow-growing, overindebted economy that remains in rehab”.