The International Monetary Fund has urged the UK to ease back on austerity should the economy slow further, as it warned finance ministers at the G20 summit in Shanghai to boost public spending on infrastructure to fuel global growth.
In a report on the UK’s economic outlook, the IMF said the risks of a more severe downturn were mounting as David Cameron’s government battled sluggish productivity growth, a balance of payments deficit, high levels of household debt, and the forthcoming referendum on EU membership.
In a mission statement drafted ahead of the G20 meeting in China later this week, it said that the power of monetary policy was beginning to wane and it was incumbent on those governments that could safely increase their spending to act together to boost global growth. The chancellor, George Osborne, and the Bank of England governor, Mark Carney, are due to attend the conference.
It said the Treasury needed to “remain vigilant to the challenges ahead and to continue its policy efforts to promote growth and further boost resilience”.
IMF officials said the Treasury had done enough to stabilise the government’s finances for it to embark on extra investment spending should GDP growth, which has slowed since last year, continue to falter. The Treasury declined to comment on the IMF report.
The report said: “Flexibility in the fiscal framework should be used to modify the pace of adjustment in the event of weaker demand growth.”
The warning follows an even tougher message from the Organisation for Economic Co-operation and Development (OECD) last week, which called on the UK to ease up on austerity and join a collective effort by the G20 to spend more on infrastructure projects to boost flagging growth.
The Paris-based thinktank, which counts 34 of the world’s wealthiest countries as members, said the G20 needed to recognise that low interest rates and money creation by central banks were no longer enough for a lasting recovery.
The OECD’s chief economist, Catherine Mann, said: “With governments in many countries currently able to borrow for long periods at very low interest rates, there is room for fiscal expansion to strengthen demand in a manner consistent with fiscal sustainability.”
The IMF echoed the OECD’s call for a coordinated spending plan by rich nations to reverse a downturn in growth since last summer.
It avoided singling out individual countries that should increase their spending, but officials warned that slowing global growth needed a different response from policymakers.
The G20 was formed to accommodate the views of rich and developing world economies in the aftermath of the 2008 crash. Members include the US, the UK, China, India, Indonesia, Japan, Mexico and Russia.
Tumbling oil prices and a dramatic slowing of the Chinese economy have spooked markets, which have slumped since last year. Fears that China, in a bid to increase its exports, is planning to devalue its currency have further undermined confidence in the ability of policymakers in the west to keep the recovery from the 2008 financial crash on track.
The US economy has joined the slide in economic activity in recent months, triggering further concerns that global trade, which has already tumbled over the last 18 months, has further to fall.
The IMF said the current low interest rates and trillions of dollars of quantitative easing provided by central banks should remain in place, but more action was needed from governments to prevent a bigger drop in global growth this year and next.
“A comprehensive approach is needed to reduce over-reliance on monetary policy,” it said.
“In particular, near-term fiscal policy should be more supportive where appropriate and provided there is fiscal space, especially through investment that boosts both the demand and the supply potential of the economy.”
IMF officials, concerned that without coordination some countries will boost spending only to suffer a rise in imports and a collapse in their currency, have concluded that the G20 needs to agree a plan of action that involves all members.
Osborne has resisted attempts to coordinate spending by G20 countries to boost growth, preferring to focus on reducing the deficit in public spending to achieve a balanced budget by 2020.
But the IMF said to support global activity and contain the risks of another financial crash, “the G20 must act now to implement forcefully the existing G20 growth strategies and plan for coordinated demand support using available fiscal space to boost public investment and complement structural reforms”.
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