Risks of a rift over macroeconomic policy among the G20 countries rose as UK finance minister George Osborne insisted that debt-laden countries must make deficit reduction a priority.
The Chancellor of the Exchequer said countries needed to show they had a “credible plan” to reduce fiscal deficits, to avoid a repeat of the sovereign debt crisis that struck Europe this year.
However his comments in an interview with Emerging Markets came as his US counterpart Timothy Geithner urged countries against “premature” cuts.
The UK has embarked on one of the most drastic programmes of spending cuts and tax rises of any major economy, and Osborne will bring this tough message to the meeting of G7 finance ministers today.
“When you are facing very large deficits, we have all had to set out a credible plan to deal with those deficits,” he told Emerging Markets.
He dismissed the idea of a battle between deficit reduction and stimulating growth as a “false choice”. “If you don’t deal with the deficit, you won’t have growth, because you will have a catastrophic loss of confidence.”
His comments threaten to put him at loggerheads with Geithner, who this week defined “the greatest risk to the world economy” as “the largest economies underachiev[ing] on growth”.
“Even if the risks to a sustained global recovery look relatively low, it makes sense for policymakers [...] to continue to focus on strengthening growth, rather than risking a premature shift to restraint”, he said on Wednesday.
Osborne insisted there was no tension with the US, saying there was a growing global consensus behind the need for concerted action to cut fiscal deficits.
“I totally reject there’s a choice, that you either support growth or deal with the deficit,” he said. “Dealing with one is essential to the other.”
He said the eurozone debt crisis showed countries with high deficits must set out clear plans to bring public finances back into balance. “The reason why so many European governments are pursuing this path is because we all understand that at the heart of a sustainable recovery has to be some fiscal stability.
“If we hadn’t, then there would be a return of real concern about sovereign credit risk that would undermine confidence.” That would feed through to the real economy.
The UK’s tough fiscal stance has received backing from the IMF, which used its annual Article IV assessment to describe the coalition government’s “strong and credible” plan to eliminate the structural deficit over four years as “essential” to ensure debt sustainability.
Osborne said the UK plan had “reassured” the IMF, which has in the past criticized British policy. “More to the point it has reassured the markets,” he said. Two-year gilt yields are stable at around 0.6%.
He dismissed comparison with Ireland, which was praised by the IMF two years ago but which last week had to mount a €40bn bank bail-out. “There are a number of features of the Irish situation that are very particular to Ireland.
“It is not clear that if they had pursued some other course two years ago that they would be in any better shape than today.”
The Chancellor said countries that cut deficits would give themselves “monetary space” – a broad hint that central banks should cut rates or embark on quantitative easing (QE).
He was speaking before yesterday’s decision by the Bank of England to keep interest rates unchanged at 0.5% and not embark on more QE.
“Monetary stimulus is a far more powerful tool in the economic locker and you can’t deploy your monetary stimulus to full effect if you are not creating the fiscal space for that to happen,” he said.
“Again I think it a rather false debate this idea that when you use the word stimulus you must only be talking about fiscal stimulus.”
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