Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the U.K. and much of Europe are wrong to pursue fiscal austerity because it won’t deliver growth, the Financial Times reported.
The comments add to criticism from the International Monetary Fund last week that Britain’s failure to grow means Chancellor of the Exchequer George Osborne should ease his deficit-cutting plan. Gross was cited by the newspaper today as saying bond investors want growth as much as equities investors.
“The U.K. and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not,” Gross was quoted as saying in an interview. “You’ve got to spend money.”
Gross’s comments mark a turnaround from his 2010 view that the U.K. budget gap -- then at 11 percent of gross domestic product -- meant gilts were “resting on a bed of nitroglycerine,” a suggestion that the then Labour government of Prime Minister Gordon Brown should tighten policy.
Six years since the start of the financial crisis, the U.K. has failed to recover the slump in output, and Osborne has had to move out by two years his hope of balancing the budget by 2015, even amid the biggest fiscal retrenchment since World War II.
“In the long term it is important to be fiscal and austere. It is important to have a relatively average or low rate of debt to GDP,” Gross was cited as telling the newspaper. “The question in terms of the long term and the short term is how quickly to do it.”
Osborne faces a new test of his economic stewardship as data due this week will show if the U.K. has escaped another recession, just days after the country lost its AAA grade from a second ratings company. Fitch Ratings cut Britain by one level to AA+ three days ago and predicted that debt will peak above 100 percent of gross domestic product.
While the median forecast of 37 economists surveyed by Bloomberg News is for the economy to have skirted a slump and expanded 0.1 percent in the first quarter, Bank of England policy maker Martin Weale said on April 18 that he wouldn’t be surprised if GDP fell. The Office for National Statistics will release the data on April 25 in London.
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