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Lagarde: Deficit reduction plans must not damage growth

International Monetary Fund managing director Christine Lagarde has warned countries tackling deficits they must be careful not to undermine recovery by damaging growth.

Writing in the Financial Times Lagarde says there is an “unmistakable need” for advanced economies to restore the credibility of their budgets but plans to deal with deficits must be delivered carefully, increasing tax revenues as well as cutting spending.

She says: “We know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. So fiscal adjustments must resolve the conundrum of being neither too fast or too slow. Shaping a Goldilocks fiscal consolidation is all about timing. What is needed is a duel focus on medium-term consolidation and short-term support for growth and jobs.”

She says the balance needs to be struck because improving fiscal conditions in the medium term allow for action to be taken to promote near term growth, while “commitments to cuts” are unlikely to survive a period of lengthy stagnation, prolonged unemployment and social dissatisfaction.

She adds that while markets may applaud sharp consolidation plans, they do not like slow or negative national growth rates.

Interest rates in the UK and the US stand at historic lows and Lagarde says they should remain that way. But, she adds: “Central banks in core economies should be ready to dive once more into unconventional waters should the need arise.”

After widespread criticism for absent European leaders in recent weeks as the Euro crisis developed and financial markets tumbled, Lagarde calls on leaders and policy makers to come together as they did in 2008 in the wake of the banking crisis.

She says: “It is now time to do so again, not only to avoid the risk of a double dip recession, but also to put the world on the path of solid, sustainable and balanced growth. There are no easy answers here, but that does not mean there are no options.

“If the global recovery falters, the burden will be borne far and wide. If policy makers can act boldly, act together and act now on these priorities, confidence can be restored and the recovery sustained.”

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