Lagarde calls for brake on austerity
Ms Lagarde, IMF managing director, cautioned against countries front-loading spending cuts and tax increases. “It’s sometimes better to have a bit more time,” she said at the annual meetings of the IMF and the World Bank on Thursday.
The fund warned earlier this week that governments around the world had systematically underestimated the damage done to growth by austerity. Ms Lagarde said that, given this reassessment of the impact of fiscal consolidation on output, it was no longer sensible for governments in Europe to stick to budget deficit targets, should growth disappoint.
“It’s much more appropriate to apply the measures and let the [automatic] stabilisers operate,” Ms Lagarde said. Automatic stabilisers allow for the lower tax revenues and higher benefit payouts associated with a weak economy. “That applies to pretty much all the countries, particularly in the eurozone, that are applying that policy mix.”
Ms Lagarde also said struggling European countries such as Greece and Spain should be given more time to reduce their budget gaps. “That is what I have advocated for Portugal, this is what I have advocated for Spain, and this is what we are advocating for Greece, where I said repeatedly that an additional two years was necessary for the country to actually face the fiscal consolidation programme that is considered.”
Financial Times October 11th, 2012