Osborne defends cuts policy amid warnings on flexibility

George Osborne has insisted the coalition’s deficit reduction plans were flexible enough to deal with the deteriorating economic situation.

The Chancellor defended his approach after IMF head Christine Lagarde said the UK government’s stance remained “appropriate”.

However, Ms Lagarde also delivered a stark warning that policymakers needed to be ready to change course if conditions worsened further.

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“As (Ms Lagarde) says, the UK’s strong fiscal consolidation is essential to restore debt sustainability given the UK’s very large structural deficit and large financial sector relative to GDP,” Mr Osborne said. “That is why Christine Lagarde says our policy stance remains appropriate.

“But I agree with her that policymakers must remain alert to risks. That is why the automatic stabilisers and the ability of monetary policy to respond are key parts of the flexibility built in to our plan.”

Mr Osborne went on: “We will stick to the deficit reduction plan we have set out.

“It is the rock of stability on which our economy is built.”

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The Chancellor was speaking alongside IMF managing director Ms Lagarde at the Chatham House think-tank in London.

He will travel for talks with G7 colleagues in France later.

Pressure has been mounting on governments around the world to respond to increasingly bleak economic forecasts.

US President Barack Obama unveiled a spending package worth around £280bn in a bid to stimulate growth and stave off a jobs crisis in the US.

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Ms Lagarde said the risks from stagnating growth were growing, and had to be weighed against risks of sovereign debt.

Although tackling deficits was crucial, “we also know that consolidation, if it happens too quickly, will hurt the economy and worsen job prospects”.

Individual countries had to find the “right pace” for their fiscal adjustments, “neither too fast nor too slow”, she added.

Those that faced “considerable market pressure” to tackle deficits would need to press ahead, while others could afford to move slower.

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Ms Lagarde said policymakers should be “nimble”. “As we all know, the policy stance (in the UK) was premised on a greater role for private sector demand, especially a robust recovery in exports, to take over as the public sector retrenched,” she said.

“But since the summer the outlook has been more subdued, including in particular Europe... and the US, which are the two main trading partners of the UK.

“So the risks and troubles are rising.

“The policy stance remains appropriate. But the heightened risk means a heightened readiness to respond, particularly if it looks like the economy is headed for weak growth and high unemployment.”

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