George Osborne to tell IMF that austerity U-turn would do damage

George Osborne will warn the International Monetary Fund that a U-turn on the government's budget plans would do more harm than good when officials from the Washington-based organisation arrive in London on Wednesday for two weeks of talks.

The Treasury intends to reject the IMF's call for an easing in the pace of deficit reduction and will insist that any change in the strategy is both unnecessary and counterproductive. 

Alarmed at the flatlining of the British economy in 2011 and 2012, the IMF said last month it was time for Osborne to do more to boost economic growth and urged that he should rethink plans to cut the government's structural budget deficit by 1% of national income in 2013-14.

The chancellor was stung by the criticism, which was seized upon by shadow chancellor Ed Balls as evidence the government had damaged the economy with an over-aggressive austerity approach.

Despite the government's poor showing in last week's local elections, Osborne has no intention of changing course but is keen to avoid a public call for a volte-face from the IMF, which initially was a strong supporter of the coalition's approach to tackling the UK's record peacetime budget deficit.

Treasury officials intend to show that any change to the strategy followed for the last three years would damage the government's credibility in the financial markets and that the subsequent increase in long-term interest rates would outweigh any benefits from cutting taxes or increasing spending.

They will also say that the sluggishness of the UK economy in 2012 was a result of the drop in exports to the crisis-hit eurozone, rather than weak consumer spending.

The IMF has become more concerned about the health of the UK economy over the last year and has called for a rethink of fiscal policy – tax and spending – unless the pace of growth picked up.

Olivier Blanchard, the IMF's chief economist, embarrassed the chancellor last month when he singled out the UK as a country that had the scope to ease fiscal policy to boost growth. 

The chancellor was particularly irritated by Blanchard's comment that the UK was "playing with fire" by refusing to change tack.