The storm rages but the IMF says we’re on track

Despite a real threat from the euro crisis, our strategy of deficit reduction is still the only sensible course 

After last week’s fall in unemployment we’ve had some more good economic news today. Inflation has fallen a full half a per cent to three per cent. For the first time since 2009, the Governor of the Bank of England has not had to write a letter to the Chancellor to explain why inflation is above his target range. What’s more, data on the public finances published this morning show that government borrowing fell even more than was thought last year, so that in just two years the Coalition Government has reduced Britain’s deficit by more than a quarter.

That doesn’t make the headlines about the euro go away. Back in 2010, this Coalition Government was formed against the backdrop of a eurozone crisis. Two years on and you’d be forgiven for asking if anything has changed.

There is one crucial difference, however. Two years ago people were asking whether Britain would join the growing list of countries in crisis. International investors were questioning our ability to deal with the huge debts that were built up in the boom times and then exposed as unsustainable in the bust. That is no longer true. Our record low interest rates are a tangible sign that investors around the world once again believe in Britain. Many economic problems remain, but our deficit is falling, inflation is falling, unemployment is falling, and we are laying the foundations for better times ahead.

As Chancellor of the Exchequer, I would say that. But you don’t just have to take my word for it. Today the two most respected international organisations that look at the British economy have passed their verdicts: the managing director of the International Monetary Fund, Christine Lagarde, has come to town to deliver the IMF’s annual report card on the British economy; and this morning the Organisation for Economic Cooperation and Development published its Economic Outlook.

The IMF in particular plays an increasingly vital role in scrutinising and judging governments’ economic policies. We know from the IMF’s own report into failings before the crisis that, when he was at the Treasury, Ed Balls used to suppress any external criticism of the enormous debts run up by his boss, Gordon Brown. Now that we know the scale of the wreckage he left behind we can only wonder at what might have been different if the country had been allowed to see those warnings.

Now Mr Balls is in opposition and he says the Government should “heed the advice of the independent IMF”. So what is its advice today? It starts by stating that decisive action to tackle the record budget deficit that this Government inherited is “essential” and that “substantial progress” has been made. When asked this morning what might have happened if this Government had not acted to deal decisively with the deficit, Mme Lagarde’s answer was stark: “I shiver.” I couldn’t agree more.

Of course, economic growth has been lower than forecast. The IMF gives three reasons for this: commodity price shocks around the world, especially the big increase in the oil price; heightened uncertainty because of the euro crisis; and the fact that unwinding the huge imbalances built up in Britain over many years is “likely to be more protracted than previously anticipated”.

I know that of all these developments, the one that people have noticed most in their daily lives is higher prices. That’s why this morning’s news that inflation has fallen is especially welcome. Things are still tough, but at least we are heading in the right direction.

As well as lower inflation, the IMF notes recent falls in unemployment as a positive sign. Indeed, it notes that there have been “fewer employment losses than in the aftermath of previous major UK recessions”. Unemployment remains too high, but our efforts to help people find jobs are paying off. The Youth Contract that we launched last month will help more young people into work.

What about the challenge of dealing with our debts? Does the IMF back the Government’s responsible deficit reduction plan or does it back Labour’s calls for more borrowing and more spending? The answer is clear: deal with your debts. It thinks the current pace of deficit reduction is “appropriate” and that the first line of defence against slower economic growth is further action on monetary policy and credit, not yet more government borrowing.

Indeed, the IMF today specifically welcomes the Prime Minister’s announcement that we will go further than we have already to make sure that the low interest rates we’ve earned as a nation are passed on to businesses and families. In the coming months we will be announcing new policies to get credit flowing to small businesses, boost the construction sector with more support for housing, and attract more investment into vital infrastructure projects.

What about the report from the OECD? It takes a similar view: “the ambitious Government plan to restore fiscal sustainability remains on track and appropriate”. It also judges that meeting our deficit targets has earned credibility “as evidenced by the very low interest rates on long-term government debt”.

The British Government has had to take many difficult decisions, but the report card we’ve got from those who take a careful, independent view of the economy is a good one.

We can put our own house in order, but we need the eurozone to do the same. The IMF says that setbacks in the euro area are the “key risk to economic prospects and financial stability in the UK”. We’ve set out what needs to be done: more support for indebted eurozone economies from the European Central Bank and the stronger economies in the zone; moves towards a system of fiscal burden sharing such as Eurobonds; and more economic reform to improve competitiveness. Whether our neighbours take the necessary action remains to be seen. We seek the best outcome but at the same time we are preparing for something worse. Contingency plans are well developed.

It’s precisely because we’ve taken the tough decisions at home that we’re ready to face the problems from abroad. No one says it will be easy, but we will do whatever it takes to keep Britain safe in the financial storm.

George Osborne- 22nd May