At a time of fierce debate on how best to reignite the recovery – in individual countries and internationally – the International Monetary Fund has emerged as a respected arbiter of economic policies. When Christine Lagarde, the IMF’s chief, warned against possible excesses of austerity this week, it was bound to cause waves.
Ms Lagarde’s words, and those of the fund’s technical staff, should be pondered not pounced on. Not just because there can be no doctrine of IMF infallibility: like most other forecasters it has been proven over-optimistic on the strength of the recovery. But also because the fund’s message is consistent with, not contrary to what it has been saying for some time.
Ms Lagarde repeated the advice she has given before, and with which this newspaper agrees. Countries should stick to their deficit-cutting policies, but not to nominal targets. Deficit-reduction outcomes may slip in the face of a worse slowdown than expected, but policies should not – nor should new cuts be put in place to “catch up”. Governments with fiscal breathing room should avoid cutting, while those without it must cut at the right pace. In particular, Greece should be given the two more years it is asking for. In the UK, further monetary stimulus and better targeting of taxes and public spending must come before any fiscal relaxation unless growth prospects deteriorate further.