Britain Must Maintain Top Quality Fiscal Policy - IMF

Jun 8, 2011
Crimson Tazvinzwa

Rt Hon George Osborne , Chancellor of the Excheq - George Osborne

IMF says UK economy is on track to recovery, but warned of high commodity prices and under-performing housing market which is damaging consumer confidence.

The International Monetary Fund (IMF) says there is no need for the UK government to change course on its economic recovery plan as current weak growth and high inflation may be short-lived. However the international lender suggests an alternative approach needs to be considered if problems such as high unemployment and low consumer spending persist.

In an annual report on the UK economy released June 6, 2011 the IMF broadly endorsed George Osborne, Chancellor of the Exchequer’s deficit-reduction policy which is characterised by deep and far-reaching austerity measures designed to reign in unbridled budget deficit and high public debt.

According to the Office of National Statistics “public sector net debt (excluding financial interventions) was £910.1 billion (equivalent to 60.1 per cent of GDP) at the end of April 2011. This compares to £765.5 billion (53.0 per cent of GDP) as at the end of April 2010.”

Growth of 1.5 percent expected for 2011

The U.K. economy is facing an uneven recovery, with a sluggish and uncertain growth of 1.5 percent expected in 2011, according to the IMF’s assessment.

“The U.K. economy is recovering from the impact of the financial crisis,” IMF Acting Managing Director John Lipsky said at a press conference in London.

He added: “The current mix of tight fiscal and loose monetary policy remains appropriate in staff's central scenario. But uncertainty around this central scenario remains high. The potential policy response would depend on the specific risk that might arise.”

The IMF Acting Chief observed that there was no significant change in growth in recent months due to high commodity prices and under-performing housing market which is damaging consumer confidence.

“At the same time, headline inflation has accelerated, reflecting both the spike in commodity prices and large indirect tax hikes,” Lipsky concluded

IMF assessment a morale booster for coalition government

The coalition government of Liberal democrats and Conservatives welcomed IMF's conclusion that their fiscal policy programme of spending cuts and tax increases remains credible.

In a BBC television interview the Chancellor George Osborne said: "I welcome the IMF's continued strong support for our overall macroeconomic policy mix, including our deficit reduction strategy."

"The IMF have publicly asked themselves the question 'whether it is time to adjust macroeconomic policies' - in other words, is it time to change course? And they have concluded definitively that 'the answer is no' ; " he argued.

Current policy mix remains appropriate but uncertainty is high

As the IMF's analysis of the UK economy fell short of an outright endorsement of its ‘bill of health’, there will be a chorus for government to consider alternative economic plans.

On the eve of the IMF’s assessment report for example, top UK economists and academics in a letter to The Guardian newspaper (June 5, 2011) rubbished the government’s austerity measures insisting there is need for a policy review.

They argued: “As economists and academics, we know the breakneck deficit-reduction plan, based largely on spending cuts, is self-defeating even on its own terms. It will probably not manage to close the deficit in the planned time frame and the government's strategy is likely to result in a lot more pain and a lot less gain.”

They believe that spending cuts are slowing economic growth due to less income accrued from taxes while more money is paid out in unemployment and housing benefits – creating an increase in budget deficit.

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