INTERNATIONAL Monetary Fund (IMF) chief economist Olivier Blanchard has warned UK Chancellor Osborne that he is ‘playing with fire’ with his fiscal policy.
Blanchard also said that Osborne should have changed his austerity strategy in the Budget last month.
Asked about the UK’s prospects, the IMF chief economist said: ‘I think conditions have deteriorated. There is no question that the fiscal plan, which was designed a few years back, was assuming that private demand would be stronger than it is.’
Blanchard warned: ‘The danger of having no growth, or very little growth for a long time is very high; you get a number of vicious cycles which come into play.’
He added that ‘the result is that people don’t spend, output is low.
‘And I think you’re playing with fire when you get to very low growth rates so… if you can decrease the speed of fiscal consolidation maintaining the credibility (so it’s not a question of whether, it’s a question of when), when growth is close to zero I think, yes, it’s worth considering.’
Meanwhile, IMF managing director Christine Lagarde says the IMF has changed its mind on the UK’s deficit reduction strategy due to the weak economic figures.
Lagarde said that an IMF team would shortly arrive in London to conduct its annual review of the UK’s economic health.
She warned that the poor performance of the British economy had left her with no alternative but to call on Osborne to rethink his austerity strategy.
The IMF support for the UK government’s budget deficit policy was not unconditional, Lagarde insisted.
She stressed: ‘Consideration should be given if growth weakens, and looking at the numbers, without having dwelled and looked under the skin of the British economy, as we will do in a few weeks’ time under the article IV, the growth numbers are certainly not particularly good.’
Her comments came as Mark Carney, the next governor of the Bank of England, called the UK a ‘crisis economy’.
In an interview ahead of the meeting between the IMF and the World Bank, he said the US recovery is leaving behind ‘crisis economies’ that include the UK, the eurozone and Japan.
