Chancellor is determined to resist pressure for greater boosts to growth in talks this week, arguing harm would outweigh benefits
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.
IMF officials are likely to point out in the discussions that the level of national output in the UK is still more than 2% below its peak five years after the recession began in early 2008. By contrast, the US and Germany have both more than recovered the ground lost in the slump.
Osborne's team knew about Blanchard's views but expected any concerns to be raised by the IMF in the Article IV discussions – the organisation's annual economic health check on its 188 member states – that begin this week. IMF deputy managing director David Lipton will issue advice to the government on 22 May at the end of the discussions.
The Treasury will say that the economy is gradually on the mend and that the IMF's anxiety about the weakness of growth has already been addressed in recent policy initiatives.
Osborne believes that the "help to buy" measures announced in the budget to stimulate the housing market, and last month's decision to target lending to small and medium-sized businesses in a beefed-up Funding for Lending scheme, should be taken into account by the IMF before it calls for a budget volte-face. And it will insist that the loss of credibility suffered by the UK from changing course would outweigh any benefits from fine-tuning the government's financial plans.
The Treasury will argue that budget plans are in line with the advice the IMF has been dispensing to rich countries following the deep slump of 2008-09: that there are other western nations doing a faster repair job on their public finances, despite even weaker growth; the IMF's view about the need for a different approach is not shared by Brussels.
The European commissioner for economic and monetary affairs Olli Rehn said last week: "The level of public debt is projected to rise to close to 100% next year.
"There really is no case for a discretionary fiscal loosening in the UK. It is important the UK follows through with consistent consolidation of public finances to achieve a more sustainable fiscal position."