IMF calls for UK government to stimulate growth

The International Monetary Fund has called on the UK government to take more action to boost the economy, which it warns is “still a long way from a strong and sustainable recovery”.

It said the £10bn-worth of spending cuts and taxes planned for the coming year would be a “drag on growth” and urged the government to do more to stimulate the economy.

The

“In a range of policy areas, the government should be more supportive of growth. What is important now is not to make a mistake today and presume that all will be well with the economy some years from now. I think it’s important to get started on infrastructure projects that will support the economy.” He said that would allow the government to push back some of the cuts and bring forward more supportive measures.

The UK could suffer higher unemployment and lose economic capacity permanently if it ignores the fund’s advice, he warned.

Labour pounced on the comments as a vindication of its economic strategy. Shadow chancellor Ed Balls said: “Behind the diplomatic language this is the call for action on jobs and growth that the IMF has been threatening to deliver for many months and a stark warning of the consequences if the chancellor refuses to listen.

“The IMF is clear that we are a long way from the strong and sustained recovery we need and backs the warnings we have made for three years that the Government’s plans risk doing long-term damage.”

The IMF noted some improvement in economic conditions, such as the buoyant jobs market and a boost in business confidence. Litpon said: “The economic data shows an uptick, we acknowledge that and welcome that but it’s modest so far. The output gap remains substantial and likely to remain so for some time, so we continue to see areas for further action.”

The fund urged the Treasury to “capitalise on the nascent signs of momentum to bolster growth” by enacting pro-growth reforms – such as changes to corporate taxation – within the scope of the coalition’s overall spending plans. Lipton said the Bank of England should also keep interest rates low until the economy is strong.

IMF officials, in the so-called Article IV report on the UK – its annual health check of member economies – warned that growth would remain weak for the foreseeable future.

“The most likely scenario is a prolonged period in which output is below potential,” the IMF said, stressing the risk that the productive capacity of the economy could be damaged by such a long period of stagnation.

The fund acknowledged that the Treasury faces a “dilemma”. “Judgments about fiscal policy need to balance debt sustainability with growth concerns,” the statement said. “The combination of continuing weak growth and high debt presents a dilemma: further fiscal consolidation will weaken output, with the risk of a permanent loss to productive capacity, while debt will accumulate unless there is consolidation.”

The chancellor’s controversial Help to Buy scheme, a centrepiece of March’s budget, came under fire from the IMF, which echoed warnings from Sir Mervyn King and the Treasury select committee that its main impact might be to push up house prices. The IMF suggested the Treasury might need to impose a tax on unused development land, in order to ensure that more houses are built.

The IMF also called for the government to set out a “clear strategy”, for disposing of the bailed-out banks, Royal Bank of Scotland and Lloyds. However, it stressed that “challenges remain”, and the process of cleaning up their balance sheets is not yet complete. The statement added that the government might need to step in as a “backstop” for RBS, if the bank needs more capital in order to be attractive to private sector investors.

The team endorsed proposals from the London School of Economics’s recent Growth Commission, which called for improvements to training for lower-skilled workers; streamlining of the planning system; and better competition in the banking sector.

The Treasury had pledged to defend its policies robustly in the face of the anticipated onslaught from the IMF, after its chief economist, Olivier Blanchard, said in Washington last month, “there is a point at which you actually have to sit down and say maybe our assumptions were not right and maybe we have to slow down”.

Osborne’s hand had been strengthened by modest signs of improvement in the economy in recent weeks, including news that GDP expanded by 0.3% in the first three months of 2013.

Πηγή: Guardian