Bruised and battered from his recent encounters with the International Monetary Fund, George Osborne retreated to an American Civil War battlefield last week to indulge a personal passion before leaving the United States for home.
Events during his four-day sojourn in Washington – hard on the heels of the emotional experience of Margaret Thatcher’s funeral – mean the Chancellor must summon all his fortitude if he is to stick with his austerity cure for the British economy.
Until very recently, Britain had been regarded as a pin-up for fiscal rectitude. It was a country willing to take the pain through cuts to deal with the twin problems of a budget deficit and the accumulating pile of national debt built up over many years. The hope was that reducing both would create the space for growth driven by households and businesses.
The UK’s rigorous approach of extended public spending and welfare cuts was viewed as an example of how to stabilise a deeply troubled economy.
Now, however, Osborne’s greatest allies have turned against him.
The IMF, the world’s economic overseer, has launched a full-scale attack, accusing Britain – and by extension the Chancellor – of ‘playing with fire’ with its austerity programme because the shock treatment has failed to spark any discernable growth.
Not only that, two of the international credit rating agencies, first Moody’s followed by Fitch – with the third, Standard & Poor’s, keeping a close watch – have deprived the UK of its much-prized ‘AAA’ top draw credit rating.
In withstanding the assaults on his economic strategy from Labour, the trades union and much of the media over the past three years, Osborne has been able to quote the support of the IMF and the credit agencies in his defence. Indeed, he made the ‘AAA’ rating totemic.
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Now, all that has gone. But most troubling – and infuriating – of all for him must be the lukewarm support of the IMF’s elegant French managing director Christine Lagarde. The Chancellor has come to expect praise and loyalty from Lagarde, having been the first finance minister from the powerful Group of Seven wealthy countries to propose her for the job when her predecessor, the priapic Dominique Strauss Kahn, left office after a hotel sex scandal.
As the IMF’s top economist Olivier Blanchard (another French citizen), led the charge against Britain, deliberately singling it out as a country that needs to change course, Lagarde remained silent. She said simply that the judgment would have to await the IMF’s annual examination of the British economy next month, during which every aspect of policy is crawled over. But her American deputy David Lipton let the cat out of the bag when he told Sky News: ‘The bottom line to us is that [Britain] may want to consider adjusting the pace of consolidation, and that’s a subject we’ll want to take up during this consultation.’
Silence: Christine Lagarde is no longer such a vocal supporter of George Osborne's economic policies
In plain English, the IMF thinks it’s time for Osborne to ease off on the cuts and go for growth – clearly believing that the two cannot go together.
Why the Fund has chosen to turn Britain from hero to zero is somewhat puzzling and disturbing. Not least because a quick glance at the Fund’s own ‘Fiscal Monitor’, its bible of global budget numbers, shows that the squeeze on economies across much of the eurozone, especially in the troubled periphery nations from Spain to Ireland, is far harsher. There is, however, another element to this aggressive volte face.
Lagarde currently finds herself under enormous personal pressure, having been summoned to appear in a Paris court to answer charges that she acted wrongly in releasing some 400million euros of state funds to business tycoon Bernard Tapie when she was French finance minister. This follows a police raid on her Paris flat last month.
Osborne will return to Britain this week politically humiliated by the IMF and the credit rating agencies, but unbowed in his efforts to put our economy back on track after the intemperate spending of New Labour
Could such a distraction have clouded her usually clear thinking?
What does appear to be the case is that she and the IMF are engaged in a huge effort to play down, or at least distract attention from, the catastrophic state of economic affairs in France – and indeed the eurozone as a whole.
Unemployment in Spain and Greece has reached unprecedented levels. France has plunged into recession, faces widespread industrial action and is watching its greatest entrepreneurial talent flee across the Channel or to Belgium in the face of taxes on the wealthy that could hit 75pc.
So how should George Osborne react? He will return to Britain this week politically humiliated by the IMF and the credit rating agencies, but unbowed in his efforts to put our economy back on track after the intemperate spending of New Labour.
He genuinely believes the course he has set is one he should stick with it. He will argue that housing schemes such as the ‘Help to Buy’ (announced in the Budget) which offers state loans for buyers of new-build houses, represent a loosening of fiscal policy which the IMF will ultimately accept.
Maybe. But three years into government, with output sluggish at best, and the deficit and debt still rising, the Chancellor finds himself under more personal pressure than at any time since he moved into Number 11.