The world’s tentative recovery from recession could be put at risk if governments repeat the mistakes of the 1930s and withdraw fiscal stimulus packages too soon, British Prime Minister Gordon Brown warned today.
Speaking to the London summit of finance ministers from the G20 group of major economies, Mr Brown urged them to maintain throughout 2010 the programmes of public spending and tax cuts introduced to tackle the recession in 2009. Less than half of the promised $5trn (€3.5trn) in extra support has so far been delivered, he pointed out.
Citing US and Japanese studies which warned that a premature move towards reducing deficits by cutting back on state spending would be “an error of historic proportions”, Mr Brown said that countries must co-ordinate their “exit strategy” from recession, which must be put into action only when recovery is firmly in place.
His plea for a “global compact for durable growth” came amid rows at the summit over curbs on bankers’ bonuses. European countries led by France are pushing for a cap on the size of bonuses in order to prevent a return to the distorted incentives which have been blamed for fuelling excessive risk-taking.
But the US is resisting the proposal, which was yesterday described as “unenforceable” by Chancellor Alistair Darling. He suggested that emphasis should instead be put on increasing requirements for banks to hold capital, which would encourage them to retain profits instead of spending them on lavish and unjustified compensation packages.
Opening the summit’s main session at the Treasury this morning, Mr Brown said there could be “no return to the past ways of governance” in the banking sector.
He warned: “Pay and bonuses cannot reward failure or encourage unacceptable risk-taking. It is offensive to the general public, whose taxpayers’ money in different ways has helped many banks from collapsing and is now underpinning their recovery.”
Recent indicators have suggested that countries like Germany, France and Japan have already moved back into growth, producing domestic pressure for governments to scale back spending and concentrate on reducing burgeoning public debt.
But Mr Brown warned that the positive growth forecasts now being issued by institutions such as the International Monetary Fund for 2010 are based on the assumption that the state support on offer in 2009 will continue to be available next year.
He said: “It is clear in my view that too early a withdrawal of vital support could undermine the tentative signs of recovery we are now seeing and lead to a further downward lurch in business and consumer confidence, reducing growth and employment and worsening governments’ debt problems over the longer term...
“The stakes are simply too high to get these judgments wrong, so to decide now that it is time to start withdrawing or reversing the exceptional measures we have taken would, in my judgment, be a serious mistake.
“On the contrary, with more than half of the 5trn fiscal expansion yet to start, I believe that the prudent course is for G20 countries to deliver those fiscal plans and the stimulus packages that have been put in place and make sure they are implemented in full both this year and next.”