U.K. Chancellor of the Exchequer George Osborne said there can be no letup in his budget-cutting program after the International Monetary Fund urged him to consider easing the pace of austerity if the recovery falters.
“Credibility is very hard won and easily lost and it would be a huge mistake to put that at risk,” Osborne said at an event today at the World Economic Forum annual meeting in Davos, Switzerland.
Britain is facing the prospect of its first triple-dip recession on record as the economy struggles to lift itself out of the financial crisis that began five years ago. The IMF cut its U.K. growth forecasts yesterday and Chief Economist Olivier Blanchard said today a “slower fiscal consolidation may be appropriate.”
Osborne said last month that weaker-than-forecast growth means it will take until 2018 to balance the budget, three years later than planned when his Conservative-led government took office in 2010 vowing to tackle a deficit of 11 percent of gross domestic product. He told Cabinet colleagues this week to begin identifying savings for the fiscal year starting April 2015.
“We have put in place what I think is a credible deficit-reduction plan,” Osborne said. “It is credible and it is flexible and we have already exercised that flexibility, so before Christmas I made it clear that I would extend the horizon of our ambitions.”
The IMF cut its global growth forecasts and now projects a second year of contraction in the euro region as progress in battling Europe’s debt crisis fails to produce a recovery. The world economy will expand 3.5 percent this year, less than the 3.6 percent forecast in October, the Washington-based lender said yesterday.
Osborne faced renewed warnings that Britain risks losing its top credit rating after government figures this week showed the budget deficit widened in December as the weak economy weighed on company profits. Investors often ignore such actions, evidenced by the rally in Treasuries after the U.S. lost its top grade at Standard & Poor’s in 2011.
Osborne said the fact that the British government can borrow cheaply shows investors have faith in his economic strategy. Ten-year gilts yielded 2.01 percent today, close to an eight-month high.