By a Newsnet reporter
In a report published this week, the International Monetary Fund has slashed its forecasts for UK growth – more than any other major economy – and has called on Chancellor George Osborne to reconsider the UK government’s austerity agenda.
The double embarrassment for the Chancellor has come as the IMF said that the UK’s economy will grow by a mere 0.7% this year and by 1.5% in 2014 – a 0.3 percentage point cut for each year.
Last May the IMF said in its annual review of the UK economy that the Chancellor should consider a different economic plan if growth failed to materialise. Without any signs that the economy will grow significantly, the IMF now believes that it is time for Mr Osborne to reconsider.
The IMF’s chief economist, Olivier Blanchard, said that Mr Osborne should adjust his £130bn package of tax rises and spending cuts, saying that the UK had “fiscal space” to afford more to stimulate the faltering economy.
Asked about the pace of austerity and budget cuts in EU countries, Mr Blanchard said:
“There are a few countries where there is enough fiscal space to go further – one example is the UK. In the face of weak demand it is really time to consider an adjustment to the initial fiscal consolidation plans.”
In an interview with Sky news, Mr Blanchard accused Mr Osborne of “playing with fire” and said that the Chancellor could do more to stimulate the British economy.
Mr Blanchard added: “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… 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.”
Asked in a follow up question whether Mr Osborne had “wasted” the opportunity of the Budget, Mr Blanchard replied:
“Well, ‘waste’ is too strong, but they surely could have done more, yes.”
Responding to the IMF’s criticisms of the Chancellor’s economic strategy, a spokesperson for the UK Treasury signalled that the Treasury would not alter its plans, and said:
“…as the Chancellor said at the Budget, we are slowly but surely fixing this country’s economic problems. The deficit is down by a third, a million and a quarter new private sector jobs have been created and because of the credibility the Government has earned, families and businesses are benefitting from near-record low interest rates.”
Commenting, SNP Treasury spokesperson Stewart Hosie MP said:
“The IMF predictions, the combined cuts for 2013 and 2014, is greater than for any other leading economy, including the US, Italy and Spain. As a result, the IMF have urged the UK government to consider greater near-term flexibility in the fiscal adjustment path.
“The IMF predictions makes for grim reading, but doesn’t surprise any of us. We know with every day that passes that George Osborne and Danny Alexander’s plans are completely backfiring. The UK’s stagnant performance also shows a fall in industrial output of 2.1% in the last quarter of last year.
“The Chancellor’s remaining credibility has gone with the loss of triple A credit rating, a timid and unimaginative budget – that in true Osborne style is unravelling – and a failed economic policy that has produced nothing but austerity and misery.
“The Scottish Government is using the levers available to it to produce better outcomes – with lower unemployment including youth unemployment than the rest of the UK – and a focus on capital investment. The economic failure of the Westminster system shows why all the economic levers should be in the hands of Scotland with independence – not George Osborne and Westminster.”
MEANWHILE, a report commissioned by the Jimmy Reid Foundation has warned that an independent Scotland may suffer if it stays with the pound.
The report, by economic consultant Dr Jim Cuthbert, entitled ‘The Mismanagement of Britain’ warns that the UK economy is in decline and may suffer due to an over reliance on the financial sector if Scotland opts for independence.
In the report, Dr Cuthbert concludes that the UK economy has been chronically mismanaged and that the pound is far from being an optimal currency area. The report also warns that the UK economy faces a potential catastrophic crisis in the not too distant future.
The report says: “The overall conclusion is that the present model of the UK economy is inherently unstable, and is at severe risk of imposing further substantial burdens on the long suffering UK taxpayer, and quite possibly of collapsing altogether”
The academic argues that in the longer term, the SNP’s current strategy of staying with Sterling is not sustainable and that Scotland would be better served by creating its own currency.
The report adds: “Strategically, since the UK is clearly not an optimal currency area, the nationalists should be developing an approach which points out the benefits of Scotland ultimately having its own currency.”
One main argument put forward against this position is that a relatively small country, particularly one with substantial oil resources, would find it very difficult to manage its own currency without damaging instability in its exchange rate.
Addressing claims that small nations with significant oil resources cannot manage their own currency without damaging exchange rate instability, the report adds;
“Small countries can have unstable exchange rates – as can large countries. But among advanced economies, over the period analysed small countries like Norway, Denmark and Switzerland have had real exchange rates which have been much more stable than the UK’s.”
Dr Jim Cuthbert interviewed on BBC Radio Scotland
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