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IMF ‘proved wrong’ by UK recovery, says George Osborne

Chris Giles

George Osborne will on Friday round on detractors who said Britain's economy could not grow amid austerity and set out a vision for strong growth with healthy public finances.

Attending the spring meetings of the International Monetary Fund, the chancellor will round on the fund and other critics who he will say "have been proved wrong" by Britain's strong recovery over the past year.

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George Osborne
Lefteris Pitarakis | Getty Images

Mr Osborne's speech signals a shift from his cautious approach regarding the recovery to one that seeks to gain political advantage from the surprising strength of the upswing as the UK's general election approaches.

The chancellor is gambling that voters will reward the Conservatives for correctly predicting a recovery would start rather than using the better economic news as an excuse to vote for a slower path of deficit reduction offered by Labour and the Liberal Democrats.

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Aides to Mr Osborne have been pondering over the past few weeks the extent to which the chancellor should give an "I told you so" speech in Washington, after the criticism he received last year that his austerity policies were "playing with fire".

To guard against criticism that he is exploiting the lucky fluke of an unexpected recovery, much of the speech is forward looking. Seeking to portray himself as an optimist for the global economy, Mr Osborne will say: "The pessimists are on the march again with their predictions of stagnation. We, the optimists, can prove them wrong again. Our nations' best days lie ahead."

He will argue that monetary policy is able to revive growth in advanced economies after the crisis, so long as the repair job on banks is completed and the public finances appear to be under control.

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"Proponents of 'secular stagnation' argue that over recent decades monetary policy has had to work harder and harder to sustain growth and has now reached its limits," he will say.

"Demand can only be sustained with further fiscal stimulus and higher government debt. But developments make this argument increasingly difficult to sustain. The evidence increasingly shows that monetary policy, broadly defined and effectively deployed, can work but with two caveats. Banks need to be well capitalised so that the monetary transmission system is working. And there needs to be credible fiscal policy."

The chancellor's words are a direct attack on the IMF, which last year urged Britain to adopt a 'Plan B' of looser fiscal policy, and Ed Balls, the shadow chancellor, who said the deficit reduction plan was going "too far, too fast".

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Highlighting the growth of the UK economy over the past year – which has expanded faster than that of other members of the G7 group of leading economies and is predicted to do the same in 2014 – Mr Osborne will say the strong recovery came "despite warnings from some that our determined pursuit of our economic plan made that impossible.

"All of this demonstrates that fiscal consolidation and economic recovery go together, and undermines the pessimistic prognosis that only further fiscal stimulus can drive sustainable growth. Indeed that is precisely the wrong prescription for our economies," the chancellor will add.

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Mr Osborne's intervention in the acrimonious fiscal policy debate at the rightwing American Enterprise Institute think-tank seeks to provide a narrative for Conservative economic thinkers in the global economy at a time when much of the leading opinion comes form the centre-left.