IMF Chief Warns of 'even Darker' Times Unless Governments Spend More

The head of the International Monetary Fund backed Gordon Brown's recession strategy yesterday by urging governments to pump more money into their economies or face a worsening downturn.

Dominique Strauss-Kahn warned that the measures announced by the G20 nations in Washington last month may not be enough to kick-start the global economy. Strauss-Kahn added that the IMF may next month revise down economic growth forecasts for 2009, which have already been cut from 3% to 2.2%

"Our forecast, already very dark ... will be even darker if not enough fiscal stimulus is implemented," he told BBC Radio 4.

In an implicit backing of the British prime minister's £20bn stimulus plan, Strauss-Kahn said he had reversed his view of state borrowing and believed that increasing government debt was the "less bad solution" when faced with the worst downturn in up to 70 years. Nonetheless, Strauss-Kahn described the increase in UK debt to fund the economic shock treatment as "disturbing".

The IMF chief said other countries should follow the British example, adding that a stimulus of about 2% of global gross domestic product, or $1.2tn (£800bn) for the G20 nations, was the best option.

"We see 2009 as really being a bad year with recession for most advanced economies and growth decreasing for emerging economies," he said. "At the G20 in Washington a few weeks ago, all the heads of state and government seemed to be aware that something has to be done and I can see that some measures have been announced, but I'm afraid it won't be enough. Our estimate is that we need a stimulus of something like 2% of GDP, which is $1.2tn."

Strauss-Kahn also rejected the argument of Germany's finance minister, Peer Steinbrück, who caused a diplomatic incident a fortnight ago when he described Gordon Brown's plan, underpinned by a cut in VAT, as "crass Keynesianism".

"I understand the traditional view of the Germans, but nevertheless I think we are in a time when we should be a bit more imaginative then we have been," said Strauss-Kahn. European Union leaders ignored Steinbrück's comments earlier this month and agreed a €200bn (£185bn) stimulus package, funded by measures including tax cuts and the acceleration of public spending projects.

He added that it was "noble" for the European Central Bank president, Jean-Claude Trichet, to warn that eurozone governments must control their borrowing, adding: "He's the head of the central bank - it's his job to say things like that."

However, Strauss-Kahn said a looser fiscal policy remained a better option than curbing borrowing, which risks exacerbating the global downturn. "I don't think as a general stance we should have a lax fiscal policy, but we are in the biggest crisis we have experienced for 60 or 70 years," he said. "The threat is that big today that we are between two difficult problems: increasing deficit, which is never good, and fighting against recession, which is even worse. We have to choose the less bad solution."

Strauss-Kahn said the reduction in US interest rates to 0.25% last week would not be enough to revive the world's largest economy, and a stimulus plan, being drafted by the incoming administration of president-elect Barack Obama, will be needed. He said the Federal Reserve rate cut was "welcome" but added: "It can't be considered enough. That's why we need to use the other tools we have in our tool-kits - namely a fiscal stimulus."