27/01/2012 11:19 GMT | Updated 27/01/2012 11:28 GMT

IMF Chief Christine Lagarde Backs UK Austerity Plan

IMF head Christine Lagarde has backed the government's austerity plan saying "the policy that is in place is the right one", in a significant boost to George Osborne.

She told The BBC's The World At One on Friday: "Our sense is that under the present circumstances the policy that is in place is the right one, and we have said that very explicitly.

"Under the current circumstances, the policy in place that consists of letting the automatic stabilisers move without readjusting and tightening the principles is the right thing to do."

Deputy Conservative Party Chairman, Michael Fallon, welcomed the comments, saying: “The government’s credible plan to live within its means and pay its way in the world has won the confidence of the markets, ensuring interest rates stay low for families and business. That’s why the head of the IMF has once again endorsed this plan.

“Ed Balls says the government should listen to the head of the IMF. It has. Perhaps he should now do the same.

“If Ed Balls and Ed Miliband want Labour to be taken seriously on the economy again, they should stop their irresponsible calls for more spending, more borrowing and more debt in the middle of a debt crisis.”

It came as German Finance Minister Wolfgang Schaeuble took a swipe at David Cameron for vetoing a treaty aimed at securing the eurozone in December.

"It would be much more better and better to understand for everyone outside of Europe, if we were to do what we will now have to do in our fiscal compact in the framework of European treaties.

"But that has to be done by unanimous decision, that is the basis of European treaties. Therefore, for the meantime, we go for 17 plus, I hope, nine. Everyone is invited to join," he said.

This Wednesday Office of National Statistics (ONS) figures showed the economy shrank 0.2% in the last quarter of 2011, a day after the IMF lowered its forecasts for UK growth to just 0.6% in 2012 instead of 1.6%.

On Friday Ed Balls pointed out the the US growth figures, released two days after the UK's, showed the country has "more than recovered the output lost in the global recession."

"Since George Osborne’s spending review in the autumn of 2010 our economy has grown by just 0.3% while the US has grown by 2.2% over the same period," he said.

“While the US growth figures compare favourably to Britain, policymakers in America are rightly concerned and debating what more they can do to boost jobs and growth. Yet here in Britain the Conservative-led government has sent our economy into reverse and is set to borrow £158 billion more than planned, but complacently insist they are going to plough on regardless.

“Of course we need tough decisions on tax, spending and pay, but to get the deficit down we also need to get our economy moving and get people off benefits and into work. David Cameron and George Osborne have eight weeks until the Budget to learn that lesson and change course.”