Oh dear. Just what Gordon Brown didn’t want to hear. Dominique Strauss-Kahn, the new head of the IMF, suggesting that the world needs a big fiscal electric-shock to help it out of its looming economic downturn.

Mr Strauss-Kahn’s view that interest rate cuts alone won’t dig the global economy out of a hole marks a surprise shift in the IMF’s position - normally it is the biggest cheerleader for fiscal consolidation.

But it is awkward for governments like Gordon Brown’s where the room for manouevre in the fiscal area is virtually non-existent. Even in the boom years, Britain’s deficit was topping 2 per cent of GDP - this year it will be nudging up towards the EU’s 3 per cent borrowing limit.

So don’t expect Mr Brown or Alistair Darling, chancellor, to be following Mr Strauss-Kahn’s advice to loosen the pursestrings a bit. They couldn’t, even if they wanted to.

Why is Mr Strauss-Kahn’s intervention bad news politically for Mr Brown? Well, it plays straight into the hands of George Osborne, shadow chancellor, who has been telling anyone who would listen in Davos that Britain is uniquely badly placed to withstand a global downturn.

Britain, he argues, has the biggest deficit of any major European economy. Automatic stabilisers - namely higher government spending in a downturn - cannot be applied. Mr Strauss-Kahn’s advice, whether economically sensible or not, is certain to draw attention to precisely that point.

January 28th, 2008 in Uncategorised | Permalink